Tag Archives: value

What makes a house a “tear down”

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[photopress:tear_down.jpg,thumb,alignright] Here in Kirkland, a lot of people complain that the builders are tearing down homes and putting up “McMansions” in their place.

I can walk up and down the streets of Kirkland and “label” each and every house I pass. “Remodel project”, “tear down”, “fixer”, “builder’s dream come true”, will sell “as is”, etc… The number one reason a house becomes a tear down is due to years and years of deferred maintenance. Often these homes are owned by people who inherited them or who purchased them many, many years ago when they were dirt cheap. The increase in taxes over the years suck up any money the owners might have had to make improvements. They have just enough money to get by and the moss overtakes the roof, the wood rot overtakes the fascia boards and siding, the trees get bigger and bigger and crack the foundation, birds make nests in the rotted fascia boards. It’s like a used car that finds its way to the scrap heap, once the cost to repair exceeds the book value.

“Book Value” of a house equals the value of the lot. The value of the lot is based on it’s “highest and best use” and based on its “potential”. If the lot would have a view IF it were a two story house, than the highest and best use of that lot is to put a two story house on it. If that gives the lot a value of $650,000, then that is the value of the dirt. People have a tendency to value a property by what is on the lot and say, “Oh I wouldn’t pay more than $350,0000″ for that house!”. If the lot is worth $650,000, then the house can’t sell for $350,000, no matter how awful it is.

Take the house in the photo above. Would you spend $650,000 to LIVE IN IT? If you would pay $125,000 to live in it, and a builder will pay $650,000 to tear it down…well then I guess everyone has to agree that it is a “tear down”. But they don’t all agree that it is a tear down. People never all agree on anything, do they?

They don’t agree because they like having a little tiny house next to them that doesn’t block their view. They don’t agree because they don’t want the noise of the builders putting up a new home next door from morning until night, day after day, so they can never take a nap in the afternoon again until the new home is finished.

They might all agree that it should be torn down, but they want it to become a new park or playground…as long as no one every comes to play in it and make noise 🙂 They never ALL agree that it should be torn down and become a “McMansion”, especially if they live in the cute little bungalow next door.

Where do the kids sleep?!?

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[photopress:dig_deep.jpg,thumb,alignright]Whether you are a buyer or a seller, you really need to dig a little deeper when determining the value of a home. One thing I noticed when I first started practicing real estate in the Seattle area, is that almost no one digs deep enough when determining value based on “buyer profile”. This is an old fashioned concept, I guess, that I learned many, many years ago when I was the Certified Corporate Property Specialist (CCPS) for a large real estate company on the East Coast. That’s a fancy name for someone who must quickly sell the vacant inventory homes of relocated executives whose homes were “acquired” via a “buyout” corporate perk. The very first question I had to ask myself when I went to the property before putting it on market was, “Who is likely to buy this house?” I needed to know if I had an expanded or diminished buyer “pool”.

Remember, the market is shifting from a “baby boomer” market to a “Generation X” market, and we have to change our thinking and valuing with the trends that are affected by this shift. “We” meaning anyone interested in the “value” of property, whether that be buyers, sellers or real estate professionals.

Here’s a simple scenario. Four houses. Each 2,600 hundred square feet per mls. Let’s say everything is comparable in terms of neighborhood, lot size, view considerations (all have a view) and improvements. The ONLY difference being the placement of the square footage, each being 2,600 square feet not including the garage.

House #1 – 1,400 square feet on the main level and 1,200 square feet on the second floor. 2,600 above ground square feet with 4 bedrooms on the second floor and none on the first floor. View from all “main” rooms, (kitchen, living room, entertainment spaces and master bedroom).

House #2 – EXACTLY the same house as House #1, but with views out the front door, not visible from main rooms and views from all children’s bedrooms only, when inside the home. In other words on opposite side of the street so front door faces the view instead of the rear of the house facing the view.

House #3 – 2,000 square feet on the main level with 3 bedrooms on main level and 600 finished square feet in basement level with one bedroom in the basement. All views from main areas on main “entertaining” level.

House #4 – 1,300 square feet on the main level with only the master bedroom on the main level and 1,300 on the basement level with three “children’s bedrooms” down in the basement. Another variation would be two bedrooms up and two bedrooms down.

What really concerns me, is I see people getting info from the internet regarding total square footage, and doing comps based on this total square footage. “The house across the street sold for $800,000, so this one is worth X on a “price per square foot” basis. Even if it is the house next door, PLEASE stop valuing property based on price per square foot based on TOTAL square footage. Clearly you can see that those four houses, all 2,600 square feet, have considerable differences with regard to value.

When a pregnant woman and her two year old walk into house #4, they have to walk right back out. Do you really think she is going to love her master bedroom with view, if her newborn baby and two year old are sleeping “in the basement”? Now, personally I love my kids being “in the basement”, as mine are grown. But I wouldn’t pay as much for the house with a huge master suite on the second floor and all other bedrooms in the basement, as I would for one with more bedrooms “up”, even though that suits MY “buyer profile“.

Diminished buyer pool means that the average family buying a home cannot live with that floor plan, and that affects value, even if that floor plan suits YOUR needs. If the answer to the question, “Where do the kids sleep?!?” is down in the basement, on a separate floor from “Mommy”….hmmmmm.

Investors be very aware of this concept, as what you are thinking is a “bargain” in the neighborhood, and buying as a flip project, may be the ones with this “floor plan flow” problem. You sink a ton of money into granite counters, etc. only to find the low price was based on these types of differences in square footage placement, and you get nailed on resale of the improved flip house.

If a house is not selling and the price is reduced below the prices of the neighboring properties, make sure you know WHY that is happening. Likewise, if a real estate agent prices a house with 3 bedrooms on the main level and views from main rooms like house #3, based on the price “per square foot” of the house next door like house #4 with the kids in the basement…THAT house may be a TRUE bargain.

How Does Mass Transit Affect Property Values?

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I’ve been at a couple of gatherings lately with Microsoft employees and other tech folk who have some money to invest and are considering investing in real estate. I’ve recommended that they consider buying along future transit lines like the green line (monorail) or the lightrail route. (If they’re feeling adventurous, I also mention the southlake union streetcar.) In making these recommendations, I’ve been operating under the assumption that additional mass transit will increase nearby property values. But rather than live by assumptions, I decided to do a little research on the subject.


Financing Transit Systems Through Value Capture does a great job summarizing how transit can affect property values:

Proximity to transit can affect property values in three somewhat different ways, one negative and two positive.

First, being located very close to a transit station or along a transit line tends to have negative effects, due to noise and air pollution from trains, and increased automobile traffic from users. These nuisance may reduce residential property values very close to a transit station or rail line.

Second, it gives one location a relative advantage over other locations, attracting residential and commercial development that would otherwise occur elsewhere in the region. This is an economic transfer.

Third, transit can also increase overall productivity by reducing total transportation costs (including costs to consumers, businesses and governments) for vehicles, parking and roads and providing a catalyst for more clustered development patterns that provide economies of agglomeration, which can reduce the costs of providing public services and increase productivity due to improved accessibility and network effects (Coffey and Shearmur, 1997). Although these productivity benefits are difficult to quantify, they can be large: just a few percentage increase in property values, a few percentage reduction in automobile and parking costs, or few percentage increase in business productivity in a community can total hundreds of millions of dollars.

The cited report operates under the assumption that mass transit not only increases property values, but that it increases them to a point where the projects could pay for themselves if only the increased property values could be “captured” through some type of taxing mechanism. This argument is one that has been around since at least the 70s, and while the argument is interesting, I’m began my research wanting to test the basic assumption that mass transit even adds value to nearby properties.

Actual Data
Probably the most comprehensive study I could find on the subject was a study by PB (a transportation consulting firm) called: The Effect of Rail Transit on Property Values. It is loaded with case studies for both residential and commercial properties, and in general, the data is clear that a property values near a rail station are much greater than those farther away. The report gives lots of data showing that property values in Washington DC, Atlanta, San Francisco, New York, Boston, Los Angeles, Philadelphia, Santa Clara County, Portland, and San Diego all increased near transit stations. (Note that many of the results are phrased “price decrease by $XXX for every XX feet further from station.’ This is just another way of saying that prices increase near the station.) While two cities (Sacramento and San Jose) showed either no effect or a decrease in home values near the transit stations, the report found that (at least in San Jose), the property along the rail corridors were historically poorer (long before the current lightrail was added) than other parts of San Jose.

The results from a study of property values around BART in the San Francisco Bay Area are pretty conclusive:

Table 1: Single Family Homes

Distance from BART CBD/Urban Suburban
(feet) (per unit) (per unit)
0 to 500 $48,960 $9,140
500 to 1000 $14,040 $7,930
1000 to 1500 $8,640 $3,040
2000 to 2500 $5.760 $5,500

Assuming this data holds for Seattle, then residents should expect to see substantial increases in property values after the mass transit is built assuming that this price increase is not already factored into the existing property values. Note that almost all of Seattle is “urban” by the study’s definition. (On a personal note, I recently purchased a home in Ballad near the proposed green line and am thrilled by the prospect that Seattlites will be essentially subsidizing my property values should the monorail ever be built!)

While, I started off thinking that additional mass transit would add to property values, I had a hard time finding any evidence to the contrary (research bias?). Nearly every article I found on-line gushed about how mass transit was increasing nearby property values:

In conclusion, after a few hours of research, I’m more convinced than ever that mass transit increases property values.

Does this mean that mass transit is always a good idea? Probably not… There are plenty of good arguments for not wanting mass transit such as increased noise, increased traffic, increased parking congestion, etc. However, if you are interested in making a good investment in the Seattle area, finding a home/apartment/commercial building near a future transit line seems like a great way to increase the likelihood that your investment will pay off in the long run.

Do you want more information? I’ve created an on-line bookmark of related articles at del.icio.us. I’ll continue to update add articles to this link as I come across them!

In addition, I’ve just received an email from Seattle Monorail staff that they will be sending me a report (hard copy) that I requested titled The New Seattle Monorail’s Potential Effect on Property Values (Seattle Monorail Project, August 24, 2002). (I have no idea why they don’t have an electronic version..). If there are any gems of information out of that report, I’ll update this posting.