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Not every improvement adds to market value

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There are a lot of persistent myths in real estate, to be sure. One that was the subject of discussion in a class I participated in this week is that the public continues to argue with the real estate industry that every dollar invested in a property needs to be directly added to the list price.

The typical scenario is this: A property owner makes some sort of improvement that he then feels (strongly) has added to the value, dollar-for-dollar. Unfortunately, the real estate agent does not agree, leading to distrust and resentment.

Often agents, both residential and commercial, run into situations where a property owner has added improvements for which cost outstrips the potential value increase. Sometimes the difference is major, and everyone can agree there’s no way (example — the $50,000 in-ground pool that absolutely does not increase the property value $50,000).

More often, however, it’s not that simple. Sellers can be very defensive (and understandably so) concerning their financial investments in improving their properties. Real estate agents can be equally defensive in their estimation that said improvements may add little to the value. This can be very tough to resolve in the absence of facts and research.

The real estate appraisal community calls the underlying rule “the principle of contribution.” In a nutshell: Any improvement is worth only what it adds to the property’s market value, regardless of the improvement’s construction cost. Sounds like common sense, right? Not so much in actual practice.

Every year, various industry publications put out updated guides to how much various improvements (windows, kitchens, finished basements, exterior, etc.) add to typical market values in the United States. This will be the subject of next week’s column, so stay tuned …

Despite the facts and experiences of their neighbors, property sellers continue to insist their improvement costs be recouped in the sale. It’s the duty of the well-informed agent to patiently and sympathetically make the seller understand that an investment in a pool, game wing or $100,000 kitchen (as I experienced recently) was primarily for their own enjoyment during their ownership. Any additions to value will be the market’s decision, not theirs.

Jeff Geoghan is vice president of marketing and communications for Coldwell Banker Select Professionals and Select Services, based in Lancaster City, with 10 offices in eight Central Pennsylvania counties. Jeff lives in East Petersburg where he also serves as mayor. Jeff has been actively involved in local government and business and has been used as a source by local, regional and national publications.

Write to the Editorial Department at editorial@cpbj.com

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