Building With the Future in Mind Since 1955

Here are two common scenarios we run into, along with their ensuing questions:

An existing home has three bedrooms and the homeowners are considering combining two of them into one, reducing by one the total number of bedrooms in the home.

“How much will the resale value of their home drop because of this decision?”

An existing home has two bedrooms and the homeowners are considering putting on an addition to the house to add a third bedroom.

“How much will the resale value of their home increase because of this decision?”

Although this perspective focuses on money, a single-bottom-line approach is important: an investment of this magnitude warrants a look at both a project’s cost and its resale value. What if one sells their home the day after a remodel has been completed?  In other words, let’s strip away the monetary effect of market changes over time and ask the simple question: “If I invest this much dough into this remodel, which will affect the number of bedrooms my home will then have, is it a wise investment with respect to resale value if I sold it the next day?”

We sure wish this simple question came with an equally simple answer but it doesn’t.  In order to share its complexity, let’s read the email conversation that Rick Dubrow had with Realtor Brandon Nelson (Brandon Nelson Partners; Broker/Owner; Cell: 360-319-0696; brandon@brandonnelson.com) in June of 2015.

BRANDON:

Hi Rick, 

Let’s discuss your question about bedrooms. Oh man, if only there were a formula! It would be so easy! As with most real estate questions, though, the answer is: “It depends.” 

Let’s start off with the sweet spot: 3 bedrooms. The ideal offering to “The Market” is a 3 bedroom/2 bathroom (3BR/2BA) home. If we look at sales data in Bellingham over the first half of 2015, here are the number of homes sold per the bedroom count: 

2 Bedroom: 63 sales

3 Bedroom: 259 sales

4 Bedroom: 130 sales

5 Bedroom: 44 sales

Pretty high spike on the curve at 3 BR, huh? Obviously, next best would be 4BR, but even then the number drops by half. 

When I’m talking to prospective sellers, one of the first things I discuss is the very basic “size of the buyer pool.” The bigger the pool, (i.e. people looking for 3BR homes) the stronger your chances of getting all the ‘good stuff’ a seller can look forward to, i.e. lots of traffic through the home; highest possible price-per-size/location/condition, etc. 

You want what?

You want what?

So if I had a client considering taking a 3BR home down to a 2BR, I’d explain that, statistically, your buyer pool is going to shrink by about 75%. Does that mean you’re absolutely shooting yourself in the foot? No way! Because again, it depends… it depends on a lot of other factors. 

Does the 3rd bedroom in your existing layout totally fail as a good BR? Is it 7×10 feet? Is the only way to get to it through another bedroom? Was it once the garage, and now there’s no garage? If any of those are the case, and you’re making a ‘funky’ house back into a conventional house, or taking it from 3 substandard bedrooms to two awesome ones, I’d support it. 

I would carefully explain and show the sales data though, to show what 2BR’s ‘generally’ do vs. 3BRs. 

If we go back again to the first half of 2015 and look at the data, we learn the following: 

On average, the 63 two-bedroom homes that sold had an average size of 1,204 square feet. The absolute biggest was about 2,000 feet. The average price per foot was $214/foot, for an average sale price of just over $245K. The absolute highest price of a 2-bedroom home in the first half of 2015 was $420K and it was a view house on South Hill. 

Looking at the 259 three-bedroom sales, the average size was 1,823 square feet — but in some cases the size ranged up to the high 4,000’s… even above 5,000 square feet. The average price per foot was lower (economy of scale always comes into play) at $187/foot, but for an average price of $336K… and in some cases well over $1,000,000. 

Again, having 3BR’s is universally accepted for any size house, any price point, any neighborhood. It’s classic ‘Americana’. There’s mom and dad — or, half the time, only one of them — plus 2.1 kids that fit neatly into the 3 bedrooms. Add a 2-car garage and you’ve got the highest and best, most appealing, layout that “The Market” is hungry for. 

What happens when you push up to 4 BR’s? Generally, “The Market” is then expecting a bigger house. The average size of the 130 sales of 4BR homes in the first half of 2015 was above 2,500 square feet (which drove that price/foot down to $175/ft. on average), with sale prices averaging $446K and 6 sales above $1M, ranging as high as $1.95M. 

Generally, at 4 BR’s ‘The Market’ is wanting some family amenities like a rec room and a yard worthy of serious play. If you were optimizing — i.e. building spec homes — you’d want to include these things in a 4BR offering… generally speaking. 

There are anomalies on every one of these lists — with one exception being that there is a clear price ceiling to the 2BR market. I would suggest to any home owner to be very, very careful reducing a 3BR down to 2BR without a holistic look at the rest of the offering, i.e. neighborhood, lot, view, etc. 

RICK:

Brandon, our worlds are so similar in that most every question is answered with ‘it depends…’ That said, can we draw any conclusions?

Here are some single-bottom-line (money only) conclusions I drew from your email:

Conclusion 1: If someone is thinking about adding additional space… an addition… for an additional bedroom, the ‘return’ appears to be a break even investment.  In other words, your data says that the ‘value’ of a bedroom ranges from $214/sf (for a 2BR home) to $175/sf (for a 4BR home).  And when someone asks me for a wild-ass guess (WAG) for an addition – say a bedroom – I answer $175 -$200/sf.  These two price ranges are practically the same. Simplistically speaking, then, having a contractor do the entire project, one would break even on the cost versus value of adding this addition. You agree?

BRANDON:

I don’t agree with this. The average price per foot of $214/foot for a 2BR (or ANY price/foot for ANY size home) also takes into account the three key components that aren’t reflected in that simple number: the land, the kitchen, and the bathrooms. The latter two are much more expensive than the bedrooms, living room, closets, etc., in a home. So if you’re adding a bedroom to a home, its market value price/foot might be $100-$150/foot even though the house overall had been $214/foot. 

Plus, as you increase the size of a home by adding on to it, you’re also entering the realm of ‘economy of scale.’ The bigger the house gets, the lower price/foot it will realize. Overall, a 3rd BR MIGHT be a break-even project, if a number of other variables are met (i.e. location, quality of the rest of the layout, funky-factor, finishes, etc.) but I would never suggest that a direct 1:1 value would be realized. 

RICK (continuing with ‘some single-bottom-line conclusions I drew from your email’):

Conclusion 2: What we see so often is this, Brandon: a 3BR or 4BR home in which the client, without adding an addition, may want to reduce their number of bedrooms, retaining their same existing square footage.  Let’s make a few calculations using your data…

Let’s take a 1,800 sf home that has 3BR’s.  Using your average value per sf, the selling price of this house = 1,800 sf X $187/sf = $336,600

The same 1,800 sf home with 2BR’s = 1,800 sf X $214/sf = $385,200 ! Jeez. The same size house with one less bedroom is worth almost $50K more.

Conclusions

Conclusion 1:  This is MAGIC THINKING… because the value of the house just increased by almost $50K.  Let’s start tearing out bedrooms!

Conclusion 2: REASONED THINKING… say we went from 3 funky bedrooms down to 2 stellar bedrooms, all else being equal, the selling price of the house may actually go up, perhaps by as much as $50K, but the size of the buyer pool just decreased by 50%.

You agree?

BRANDON:

I agree with Conclusion 2 the REASONED THINKING… That’s a fair assessment. 

Rick pulling trailerRICK:

Now I’d like to describe the potential project that led to my question in the first place:

Our client has a small bedroom upstairs (very small; no closet; aggressively sloped ceilings)… funky; hard to call it a bedroom but it was marketed as such.  In fact I’d guess that most buyers who looked to buy it would conclude that it’s really just a 2 bedroom house; that the third ‘bedroom’ really offers them no value; that the third bedroom is worthless.

That funky bedroom is adjacent to a bathroom that needs to be expanded; a must-do from the client’s perspective.

Two readily apparent choices arise:

1.  Expand the bathroom into the funky bedroom space, thereby losing a ‘bedroom’.  At a WAG (wild-ass guess) level, this might cost, say, $20 -$25K. The return on investment, according to the Cost v. Value Study done by REMODELING MAGAZINE is about 70%. So the value of the house, after spending $20K to $25K, would go up $14K to $17,500 due to the bathroom remodel. Since the original third bedroom is worthless, their selling price wouldn’t go down by eliminating the worthless bedroom.  Yes, their buyer pool just got cut in half.

2.  Add a dormer or extra space to allow for the enlarged bathroom and a larger, more ‘normal’ bedroom.  At a WAG level, this might cost, say:

The bathroom @ $20 -$25K

The additional bedroom space = 150 sf of additional space @ $150 to $200/sf = $22,500 – $30K

TOTAL project cost = $42,500 to $55,000

 My gut conclusions

1. So the value of the house, as in (a) above, would go up $14K to $17,500 due to the bathroom remodel

2. Since the value of the original third bedroom was worthless (my assumption), then the new, ‘Americana’ bedroom, would add the following value: 150 sf x $187/sf (the avg. value of a 3 bedroom home) = $28,050

3. So they would spend $42,500 to $55,000 and their home value would go up $42K to $45K

4. Their buyer pool stays very high because it’s then a cool 3 bedroom home

This seems to say to me that if these clients have the dough, adding the dormer or extra space makes sense and cents.

 Do you agree?

BRANDON:

I probably agree with this. The fact that it becomes a true 3BR with a functional, cool bathroom on that same level, will definitely increase the size of the buyer pool and the value. I think your <100% increase in value is reasonable, but remember that adding BR square footage doesn’t necessarily give you an automatic multiplier times the sq. ft. price. I do think you’re being reasonably careful in your assessment, though. 

One other factor that must be considered though, too, is whether the extra $42-$45K jump in market value (and therefore list price) pushes it into a much slower-selling price range than it would have been before. It probably wouldn’t because we’re not talking a LOT of money there, but for example if I had clients threatening to spend money to take a $450K house up into the mid $500K’s, I’d caution them strongly. The buyer pool is significantly smaller at $550K, even if the house is cooler. 

We could go on and on, but I think we’ve done some good, careful, and reasonable analysis here Rick. Of course, it all falls under the infinitely wide umbrella we choose to call the “it depends” factor.

Don’t say I didn’t warn you about the complexity of this answer to so seemingly simple a question.  Now it’s time for you to apply these principles to your own particular situation.  “What’s the resale value of a bedroom?”

You’re brilliant!  I’ll bet you answered it with some permutation of “…it depends.”

Which is why we so often suggest that our potential clients talk with a Realtor about their particular situation.  Although we know so much about the cost of a remodeling project, an experienced Realtor like Brandon is more aligned with estimating its value.  And he’s quoted here because we trust in his experience, knowledge and caring. Consider calling on him to help you through your decision making process.

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