The Modern Minute: Thoughts on Modern Home Values
Whenever I’m contacted by somebody who’s thinking of selling their modern home, and they want to meet to discuss it, one of the first things I do is send them a document about how values are set in the marketplace. What you’re going to read below is the contents of that document, with some additional commentary added.
There are a couple of reasons that I like to send this doc before we meet. The most important one is that I want to set people’s expectations. But I also want people to know that when we get to discuss pricing, if the numbers we talk about are lower (or significantly lower) that what they were expecting, that it’s nothing personal and has nothing to do with the specifics of their home in terms of whether or not I think it’s a “good” house or a “nice” house.
The most important thing to remember is that values are set 100% by the marketplace. They’re not set by sellers. They’re certainly not set by Realtors. They’re based entirely on supply and demand, just like any other “product”. Yes, when you decide to sell your modern house, as cold as it may sound, you’ve decided to turn your home that you’ve loved and loved living in into a product. And because of the nature of that “product”, it’s going to elicit a lot of emotional response from people who see it. Maybe they’ll love it. Maybe they’ll hate it. But their opinions are just that – opinions. They don’t make your home better or worse than it is. And ultimately, the marketplace will set the value of your home just like it does with every other home.
My job as a Realtor (well, one of the many jobs I have as your Realtor), and as somebody who specializes in modern homes, is to research and understand our market here in the Chicago suburbs, and your home’s specific market (more on that later) to work out what price makes the most sense in terms of your goals.
The approach I take to pricing with any given client is based, in some part, on that client’s specific situation. Because a client with a 2nd home, no mortgage and who’s in no rush to sell is going to have different priorities than a client who needs to sell immediately due to a job transfer.
But wherever you fall in that spectrum, if there’s one thing that’s incredibly important to remember, it’s this: It’s never a good idea to purposefully overprice your home! Often, potential clients will say that they’d like to price their home above the market to create a “perceived value” for their home in the marketplace. Unfortunately, that doesn’t work.
First, let’s look at some actual market data. The FHFA shows that Illinois as a whole had just a 2% property value increase last year. Forecasts, before the coronavirus pandemic, were for prices in Illinois to be relatively flat, and probably with a slight decrease in both sales and values.
Second, all pertinent info about home sales is available online, to everybody. Sales history. Pricing history. Market time. Photos that show condition. And even if a particular home hasn’t sold in the last 20 years or more, other homes in the neighborhood have, so all of the market data is out there and, again, available to everybody. Most people aren’t going to overpay for a home, period. There are very rare cases where people will be willing to pay above market value for a home, because of specifics of that home: Location (of course), architectural pedigree, condition being drastically better than most other homes, etc. It does happen from time to time, but that can actually lead to potential issues if the buyer is getting a mortgage, because…
Third, most homes need to have an appraisal done. Now, this is actually changing right now, partly because some things had already changed during 2019 in terms of appraisals, and partly due to concern over appraisers going into people’s homes during the stay-at-home mandate we and much of the rest of the country are under. This week it was announced that the FHFA is going to ease appraisal standards by utilizing “appraisal alternatives”, such as automated valuations and drive-by appraisals rather than what we’ve been used to since the market turned around in 2012. However, while this will allow more transactions to close with an easier and, possibly, quicker appraisal, it also means that if the price doesn’t fit into the parameters that the automated systems are expecting, or a drive-by doesn’t give the appraiser the warm and fuzzies regarding the price to apparent condition ratio, there’s even less of a chance of a home appraising above market value.
Fourth, overpricing your home will very likely lead to a lower sale price, ultimately, than if you’d priced it correctly from the beginning. The most important time for a listing is the first two weeks when buyers, unable to find what they’ve been looking for, are excited to see something new come to market. Overpricing a home could not only prevent you from getting any offers, but prevent you from having any showings at all. Even if you get showings, you’re very likely not to get any offers if your price is too high, because buyers won’t often low-ball a listing, especially if they really like the house, because they don’t want to insult the seller.
Fortunately there is some good news, which is this: The value of modern homes IS in fact going up in our area! But there’s a catch. The home either needs to be original enough to appeal to purists (and priced accordingly), or it needs to have been remodeled or rehabbed in such a way to appeal to the vast majority of current buyers who want little to no work to be done. And with modern homes, that means that you have to be very careful about the products, materials and finishes you choose when making updates and improvements to your home.
Of course, this is something I can help you with, but we can talk about that another time. For now, please read below to see what I send to potential sellers of modern homes. Note that while I typically only send Exclusive articles via the newsletter, I decided to make this article public, as I think it’s important that the information be “out there”.
NOTE: If you haven’t subscribed to The Modern Minute, please do! Every month I send out valuable market data regarding modern homes in the Chicago area, as well as exclusive articles on things related to modern homes. You can subscribe for free here.
Here’s the content of what I typically send to potential clients wishing to discuss selling their modern home:
How are home values set when selling a home?
Home values are set entirely by the marketplace. A home should be priced compared to the homes that are the most similar in the area, meaning within the same set of schools or, when referring to subdivision homes, within the same subdivision.
When setting home values, we typically look at sales for the last 12 months, as that’s what appraisers will do when the buyer is getting a mortgage. If there are no good comps (homes in the same area, of relatively the same size, on lots of relatively the same size), then we can look back further than 12 months, but there’s no guarantee an appraiser will do the same.
Do modern homes have a higher or lower value than traditional homes?
The style of a home (modern, colonial, Tudor, Victorian, etc.) typically has very little to do with the value of the home, as style is more of a personal preference. There are some cases when this is not true, such as with homes designed by Frank Lloyd Wright, which will generally sell for a premium due to him being the architect, or homes that are exceptional for a number of reasons (location, siting, design, condition, etc.) [Note from Lou: As I wrote before I pasted in the contents of this document, values of modern homes in the Chicago suburbs DO seem to be going up compared with traditional homes IF the home in question meets certain criteria, which I’m happy to discuss with you in more detail]
What factors contribute to value, then?
Keeping in mind that we will typically consider looking just within the same set of schools, the factors that determine value are things such as:
Rooms & features
Updates & Improvements
How do those factors affect price?
Location – Aside from general location (town & schools), following are some things related to location that can either increase or decrease the value of a home compared with other properties. Favorable aspects include things such as being adjacent to a nature or forest preserve, having a larger lot than most of the neighboring homes, being on a cul-de-sac, having a lot with a higher elevation than most of the neighboring homes or backing / siding to a pond or lake. Unfavorable aspects include being on or backing / siding to a busy road or highway, being in a flood zone, being adjacent to high power lines, having a smaller lot than most of the neighboring homes, being in a “low spot”, especially in wet areas.
Overall Size – Size is usually a general indicator of value in that a house that’s 2,000sf will not be compared with a house that’s 6,000sf. The smaller a house, differences in size account for greater differences in value compared with much larger homes. And the average or median price per square foot is not linear. In other words, a 6,000sf house is not automatically worth 3x a 2,000sf house in the same area. If most of the homes in an area are large homes, a small home might be worth far less because it’s less desirable in that area. On the other hand, a very large home in an area full of homes that are much smaller can suffer from being “too big” and not be valued as high for its size as one might think, or may take longer to find a buyer.
Rooms & Features – Bedroom and bathroom count is the most obvious part of this factor, but we can typically “adjust” the value of a home based on bedroom & bathroom count when comparing to other properties. However, in some cases, it’s harder to do so. Homes that only have 2 bedrooms, for instance, are always going to be valued less than homes with 3-5 bedrooms, and can be much harder to find a buyer for as a result. Homes with 6 or more bedrooms don’t necessarily have “extra value” for the extra bedrooms, because fewer people need that many bedrooms anyway. Ranch homes typically command a premium these days, since they allow for easier living patterns due to not having stairs, which is essential for the concept of “aging in place”. However, the value of a ranch is largely negated if the laundry room or some other daily need is in the basement or otherwise not on the main living level. If most of the homes in an area have basements, a home without one could be valued much less due to not having that area for storage or secondary living space. Full basements will add value compared with partial basements, and walkout basements (where you can walk out onto grade) typically result in an even higher value. If a house has a carport instead of a garage, but most of the neighborhood homes have a garage, the house with the carport will have a lower value. Homes without a master bathroom are generally valued lower than homes that have one, and homes without adequate closet space are going to be a tougher sell, if not actually valued lower, than homes that have more.
Condition – When we talk about condition, we’re talking primarily about maintenance. This plays a significant factor in home values. In the Chicagoland area, especially in the North Shore and Northwest Suburbs, it is expected that homes are well-maintained, and that there is no deferred maintenance. Homes that fall into that category are at baseline market values, and homes that would be considered not to be maintained as well, or as completely, are going to sell for less. So putting on a new roof doesn’t necessarily add value to the house (in and of itself), because it’s expected that the roof on a home will be in good condition with no issues and not in need of replacement. Single pane windows will provide less value to the home than if the home has thermopane or insulated glass. In some modern homes, glass replacement can be a significant expense, and some buyers who are passionate about modern architecture are willing to forgive older single pane windows, provided they operate as intended (where operable) and that the frames are not rotted. Speaking of which, exterior wood trim, structural posts and beams, and siding should be in good condition and rot-free to maintain market value. Worn or soiled carpet should be replaced prior to listing a home for sale. Interior surfaces that are painted should be freshly painted if the paint is worn, scuffed or otherwise noticeably in a condition that’s not great. If HVAC equipment, especially air conditioning components, are more than 15-20 years old, it’s a good idea to replace them prior to listing, as they typically don’t last longer than that. If those systems are having any type of issues, replacing them will keep value and help alleviate issues that will arise during the home inspection. If a property has an old, buried fuel tank from before natural gas was readily available, it will need to be removed prior to selling the home. My recommendation is ALWAYS to remove it BEFORE you list the house, as then you won’t have to disclose its existence.
Updates & Improvements – This category has more to do with remodeling and rehabbing than general condition. A home that has been fully remodeled, assuming it’s a good remodel done by professionals, is almost always going to command a premium. Most buyers, today, don’t want to do a lot of work to a home, so they’re willing to pay more for a home that’s been nicely remodeled to avoid having to do it themselves. If most of the homes in a neighborhood have been remodeled, the ones that haven’t will sell for less, relatively. Now, with modern homes, this topic is much more complicated, because people passionate about modern architecture expect a “good” remodel to be in character with the home’s architectural style. That means clean, simple lines that match the architecture, and materials and surfaces that don’t betray the style of house. The list of “Dos and Donts” is too extensive to get into in this paragraph, but as an example, a long, low, mid-century modern home with a flat roof that has a remodeled kitchen is going to appeal much more to modern architecture enthusiasts if the kitchen has slab-style doors with integrated or modern pulls and countertops that are matte finish quartz, terrazzo or concrete (or even wood or stainless steel) than if the kitchen has very heavy, ornate colonial or French style cabinetry with curly handles and shiny granite counters. In other words, with a modern home, the updates should always be in character with the architecture to fully add value.
Lot Size – This one is at the end of the list because it’s highly variable, and is also very dependent on other location factors. For instance, in a subdivision type of neighborhood, lot size can play a significant factor in value. If the homes in a subdivision are typically on ¼ acre lots, and one or two houses are on ½ acre lots because they’re on a corner or at the end of a cul-de-sac, those homes on the ½ acre lots are likely to command a significant premium compared with the other homes there, because that’s an aspect of the property that can’t be changed, and is a big benefit compared with other homes in the neighborhood. However, in areas with all custom homes that were built at different times, and especially where lot sizes are typically larger, large differences in lot size may not contribute directly (or much) to overall value. For instance, if most of the homes in an area are on 1 – 1 ½ acre lots, a home on a 2 ½ acre lot will probably be worth more, but maybe not a lot more. This is especially true if the area is heavily wooded, or near / in a flood zone and that extra land isn’t “usable” in some fashion that gives it significant extra value. In the other direction, however, a smaller lot in an area of larger lots will almost always have less value than the neighboring properties.
Many aspects of a particular home will come down to personal preference for the party who buys the home. It’s important to note that personal preference can play a large role in how quickly a home sells or how long it takes to sell, but generally does not affect value, unless the specific thing you’re talking about falls into one of the categories above. As an example, a home somewhere in the North Shore that’s on a ravine and, as a result, has very little table land or grass, might very well appeal to certain buyers who don’t want a large yard to take care of, but the value of the property may still be less than surrounding homes that have more space for kids or pets to run around, or areas to garden or entertain outside. And again, many buyers looking for a mid-century modern home, may actually prefer a home in original, un-modified (read: not remodeled) condition, but in the vast majority of cases, they will not be willing to pay as much for it as a house of the same size, in the same area that’s been well remodeled, where everything is relatively new. And that personal preference aside, it’s unlikely an original-condition home would appraise at the same value as a home that’s been completely re-done. Again, all of the possible iterations of what can / can’t affect value are too numerous to detail here, but I’m always happy to talk through such things.