[Vortex] The Hall Monitor: Relieving Us of Our Bathroom Adjustment Politics
Posted by Jonathan J. Miller -Wednesday, December 22, 2010, 9:49 AM
21 Comments
Guest Columnist:
Todd Huttunen
Todd Huttunen began appraising more than 20 years ago with a few years off in between to pursue a career in cabinet making. He relegated that to hobby status and is currently an appraiser in an assessor’s office. His best friend dubbed him The Hall Monitor because of his rigidity and respect for rules. He offers Matrix readers tongue-in-groove insight on appraisal and housing issues. View his earlier handiwork on my first blog, Soapbox
At first glance, to the uninitiated, his insights appear to the far right of wonkiness but in reality they apply to all real estate professionals so read carefully my friends. I’m glad to have his contributions on Matrix.
The Adjustment for One Full Bath Versus Two
December 21, 2010
When valuing a residential property, an appraiser is faced with completing a form, most of which is already populated with a series of “canned comments” that do not change from one report to the next. Where the rubber meets the road is on the sales comparison grid – this is where adjustments are made to the comparable sales in order to arrive at a value estimate for the subject. Most every unit of comparison for which an appraiser makes an adjustment involves some degree of subjectivity. From a property’s location and size, to its curb appeal, to whether or not it has a fireplace or a pool or a finished basement – all these attributes will affect different people differently – save one.
There is one thing – and only one thing – in a house that is used by everyone, multiple times, every day for a variety of vitally important functions. Although we take it for granted, life as we know it would not be possible without the bathroom. The motivation for this article was to try to discover, once and for all, the value difference between a house with only one full bathroom versus one with two. And the reason for this is that when it comes to houses in my area (Westchester County) the market has spoken clearly and unambiguously. A three bedroom house with fewer than two full bathrooms near those bedrooms is considered functionally obsolete in this regard. Whether or not the functional obsolescence is “curable” in every case is an open question. In my opinion, more often than not, it isn’t. Thankfully, we have the grid to help us reconcile differences between the subject and the comparable sales. Unfortunately, in the appraisals I’m seeing, the adjustments most appraisers are making (usually $10,000 to $15,000 per full bath) between houses with one or one-and-a-half bathrooms and those with two or two-and-a-half bathrooms are wholly inadequate. In an effort to find out the appropriate adjustment for one versus two full bathrooms, I did what appraisers have been trained to do. I looked to the market for the answer.
Based on MLS statistics, of the 50,000+ sales of single family houses in Westchester County since 2001, 81% of them have at least two full bathrooms. While I’m no statistician, I think 81% of a sample that large is statistically significant. Now to the more important question: what is the appropriate adjustment for an otherwise very similar comparable sale which has, say three bedrooms and one-and-a-half bathrooms as compared with the subject’s three bedrooms and two-and-a-half bathrooms?
In order to isolate the value of the second bathroom, I wanted to be sure to eliminate other differences that might account for a difference in sale price. For example, houses with only one or one-and-a-half bathrooms might naturally be located in neighborhoods of lower priced homes than those with two or more. So I set up different sets of search parameters to test for the one that provided the best answer. The sample set that yielded what I believe is the most reliable data used the following search criteria: I searched for sales throughout most of Westchester County, but skipped the areas that comprise the lowest price tiers. I restricted the year built to 1950 through 1970, the Gross Living Area to 1,500 through 1,900, and the number of bedrooms to three. Then I entered the number of bathrooms either as 1.1 (1 full, 1 half) or 2.1 (2 full 1 half). I wanted to limit the search to basic box “Colonials” that were so common in 50’s and 60’s construction. These typically occupy a 50 x 100’ lot and consist of a two-story house with a basement. The first floor usually has a living room, dining room, kitchen and powder room while the second floor has three bedrooms and either one or two bathrooms. I didn’t search for houses with two full bathrooms as this would have brought in Split Levels and Ranches which are different enough from Colonials to have diluted the data. I was looking for the appropriate adjustment when comparing a house with 3 bedrooms and 1 bath on the second floor to one with 3 bedrooms and 2 baths on the second floor.
My search revealed 882 sales with 442 having 1.1 (1 full, 1 half) bathrooms and 440 having 2.1 (2 full, 1 half) bathrooms. The one-and-a-half bathroom houses are detailed as follows:
- Number of sales 442
- Average Sale Price $494,660
- Average Gross Living Area 1,681 sf
- Median Sale Price $500,000
- Median Gross Living Area 1,680 sf
- The average sale price per square foot was $294 and the median sale price was $298.
- The two-and-a-half bathroom houses are detailed as follows:
- Number of sales 440
- Average Sale Price $562,120
- Average Gross Living Area 1,738 sf
- Median Sale Price $555,500
- Median Gross Living Area 1,750
- The average sale price per square foot was $323 and the median sale price was $317.
To summarize, although the houses with 2.1 bathrooms were only slightly larger in living area (reflecting the size of the additional bathroom) they sold for between $55,000 and $67,000 more than the houses with 1.1 bathrooms. Therefore, a market derived adjustment for a basic 1,700 square foot house with 3 bedrooms and 1.1 bathrooms as compared with a 3 bedroom subject of similar age and style that has 2.1 bathrooms would be $67,000 (using the difference in average sale price as a model) or $55,000 (using the difference in the median sale price) or something in between. I’m going to use $60,000, which is a nice round number and happens to be 12% of the $500,000 median price of the one-and-a-half bathroom house. I imagine this will come as a shock to many appraisers. I don’t know about you, but I’ve never adjusted a $500,000 sale by $60,000 for a bathroom. Can you imagine what your bank client would say? And yet, if my analysis is sound, this is exactly what appraisers are supposed to do. The fact that we may feel sticker shock says only that the bank-imposed “guidelines” as to maximum percentage adjustments should be thrown out the window. If those adjustment guidelines truly reflected the market, then all or nearly all houses within a given neighborhood would sell within a much tighter range of value than they actually do.
Previously, I noted that more than 80% of the 50,000+ houses sold in Westchester in the last 10 years have two or more full bathrooms, demonstrating a clear market demand for this feature. Consider also that if you are looking to buy one of the typical 1,700 square foot “boxes” I analyzed above that has only one full bathroom, what is the “cost to cure” the deficiency? I would argue that in order to construct a second bathroom on a second floor that measures 850 square feet and already contains 3 bedrooms and one bathroom (without cannibalizing an existing bedroom), you would need to construct a two story addition! The property may indeed warrant a two story addition (at a cost well in excess of $60,000) but if all you are looking to do is add a bathroom, then the deficiency is functionally incurable. The cost to cure in this case surely justifies the $60,000 adjustment to the house that lacks so basic an element as the market clearly demands. Better still, don’t use houses with one-and-a-half baths as comparable sales to value houses with two-and-a-half baths. Although, now that we have a market derived adjustment, that’s no longer a problem, is it?
As I wrap this up, I just want to return to the reason why I wanted to address this issue in the first place. And that is because the bathroom is the one item whose importance to every individual’s life is the same. Much of family life, and conversation, revolves around it. Invariably during dinnertime at our house the topic of who is taking a shower before bed comes up because in the morning there won’t be enough hot water for all three of us. On our way to Long Island for Thanksgiving this year we had to detour off the Cross Island Expressway and we all know why. Attending to these needs takes precedence over everything else for every one of us. The bathroom is the only thing we have in our houses that we insist of having ready access to when we are away from our houses as well. That being the case, let’s give it the attention and weight it deserves in our sales comparison analysis grid. There is a world of difference in value between a house with only one full bathroom as compared to a house with two. It’s time that more appraisers woke up to that fact.
And finally, consider how the size of the adjustments you make for bathrooms compares to those you make for other features. When was the last time you were in someone’s house and asked this question: Before I leave, would you mind if I used your fireplace?
Thanks, thanks, thanks, for reporting the results of using technology in an endeavor that is anachronistic to the point of fossilization. $60,000.00 for three more plumbing fixtures is an eye-popper, but I’m gonna try that for an experiment here. My market will probably give a premium to outhouses. But wait, I forget the MLSeze for those.
“And yet, if my analysis is sound, this is exactly what appraisers are supposed to do.”
Now it remains to be seen if we can survive and do what we are supposed to do. You know, the banks and Freddie are pushing the use of AVMs that do exactly what they are told.
The hand that feeds us will bite us.
Well finally a fellow appraiser who’s not afraid to seek the truth, and then put it out there for all to see. Your study exposes an ongoing problem, and that is that most appraisers are “afraid” to make sizable adjustments, even when they are market derived. I say “afraid” because many appraisers let the concerns of a client dictate what an appropriate or acceptable adjustment is. So yes I think you are onto something in that bathrooms are worth far more than the pitiful (i.e. $5,000-$10,000) adjustments we often see on reports.
Case in point; We were recently asked to review an appraisal of a $15,000,000 property. The appraiser cited six $9.5-17.5 million dollar comps in which he adjusted $20,000 per bathroom. His adjustment worked out to a pathetic 0.1-0.2%. Really??? Why bother???
Just be ready for appraisers, underwriters, etc., who are going to say it can’t be more than $10,000, cause they’ve been appraising for a hundred years, or this is how it’s always been done, or this is how they were taught to do it, and blah, blah, blah.
Peace – John
Todd, that is just an outstanding analysis which I’ll have to keep in mind when representing buyers or sellers. As mentioned above, it’s a shame that the lenders don’t seem to care about value, just selling the paper.
I definitely think it is an under adjusted amenity and your logic is sound. However, I also see it as part of a “bundle of amenities” – something else is not being captured that also explains the difference in sales patterns. There is some other defect that is associated with houses with one bathroom that might not be adequately considered.
Great stuff!
We are talking about basic houses here. A two story rectangle, 30′ x 28′ give or take a foot. Houses like these are not “amenity laden”. An amenity on a house like this is central air conditioning. Would someone with a 1,600 square foot house with one-and-a-half bathrooms be any more or less likely to install central air conditioning than someone with 1,675 square foot and two-and-a-half bathrooms? Same with basement finishes.
I have demonstrated that there is a clear demand for two full bathrooms. If you had a choice between a house like this with one bathroom on the second floor, or two, which would you choose?
This is a case where we should put the question to the broker community. They are the ones working with buyers every day and they surely know what buyers are willing to pay more for, as opposed to those things that are “nice to have” but not necessary.
My wife, my daughter, and I have a condo with two full bathrooms. If I could have the same size unit with only one bath I wouldn’t buy it, even if it cost me $100,000 less! My daughter is about to turn 13! I want MY OWN BATHROOM!
Let me relieve my self right now (sorry). I agree with your point in the way you present it. 2 identical houses side-by-side, one with a single bathroom and one with 2 bathrooms – its a significant difference. We see that with 2-bedrooms in Manhattan. A 4-2-1 and 4-2-2 see a much larger difference in value than the numbers we see used every day. However, I am having a hard time seeing your housing market example as having such a homogenous character as this example suggests. If you have that many sales of 1-bath houses, it would seem to me there is no reason to go outside this housing niche for comps. It’s like using a 3-bedroom with a 2-bedroom. Different markets and therefore significant adjustments would be warranted and you don’t cross over and compare unless absolutely necessary. You could also use a 5,000 sqft house with a 1,600 sq ft house with huge adjustments but it wouldn’t be acceptable either. If someone is using all 1-baths against a 2-bath subject, the value would be understated in current practice. If all the comps were identical to the subject with some having 1 bath and some having 2 baths, it would be seen on the grid unless the other adjustments were wrong.
I think what you have done here in this situation is defined a niche market that is not being identified by the appraisal community. These 2 housing types should be mutually exclusive in the comp selection process, no?
No.
Sorry Jonathan, not to criticize the master data cruncher, but I don’t understand what you are getting at.
Are you saying 1 and 2 bath houses are different and should not be compared? What?
I mean, lucky you to have so much that is homogeneous and the data is so coming out of your ears, but for those of us with a different experience (i.e. lilliputian markets) Todd’s explanation is compelling and looks like something I’d do. I’d never find 400 comps for anything though.
Why doesn’t he e-mail it to you and you sort it? Then question it and tell us where the breaking points are and how you decided that. Maybe we’ll all learn something from it. I’m sure Todd isn’t all that committed to $60K bathrooms that he won’t share his data.
Surely you haven’t decided what bathrooms in Westchester are worth (wherever that is). If you get into confidence levels and standard errors go slow would you? I’m trying to figure out what those mean in my neck of the woods where R2 is usually 30% or less. Could be I don’t know a comp from a comp.
Regardless, the second bath is worth $60K.
Jonathan says there must be something else hidden in the data and while I understand the need to question our assumptions, inferences and conclusions, Todd indicates he did that and said it’s $60K.
Why doubt what he says?
Todd went back 9 years and I will assume he made the time adjustments needed.
Jonathan says either the 2 or the 1 is a niche. Why?
I can hardly contain my enthusiasm for discussing this.
I think Todd considers 1 bath and 2 bath houses as otherwise interchangeable and comparable, but differentiated by price. Where I am that isn good science.
I think Jonathan is saying that since there are so many of each and the differential is so significant that they are different niches and should not be compared, which is a little different than saying the value adjustment Todd found is incorrect. If I understand it correctly, Jonathan is saying that those who buy the 1 bath will not buy the 2 bath.
I think from an effective demand perspective Jonathan is correct. The buyers that can afford a 1 bath can’t qualify for the 2 bath. Ergo, different market, same neighborhood.
Am I getting this right, Jonathan?
2nd bath is still worth $60K, but the guy that buys the 1 bath can’t and therefore will not, buy the 2 bath.
I meant to say IS good science. Fat fingers.
[...] APPRAISER PROVIDES FASCINATING INSIGHT ON THE VALUE OF EXTRA BATHROOMS [...]
So, I decided to repeat Todd’s search as nearly as I could here where I am. I searched all of Pueblo and Pueblo West. In my first search I set the parameters at 1950 to 1970 built homes. No results. I took off the age and still no results. I took off the bedroom limit and still no results. I then inserted bathrooms from 0 to 1.5 and got 351 sales from 2006 through 2010 (MLS started over late on 2005), most with 2 bedrooms and all with 1 bath. Then I ran the same search with 1.5 to 2.5 baths and got 625 sales.
I did not limit as to style, since previous research here indicates insignificant preferences for style at least through market price. So I was comparing rtanchers with two stories, splits and basements. I just compared the GLA.
Results: 1500 to 1900 SF, 1-1.5 bath Number of sales: 351 Avg GLA: 1670 SF Avg Sales Price: $70,000.00
1500 to 1900 SF, 1.5-2.5 bath Number of Sales: 625 Avg GLA: 1680 SF Avg Sales Price: $119,000.00
Difference attributed to one bath; $49,000.00
That one bath thing works about the same way here. I did not avoid high or low priced areas and analyzed the entire market area. By golly, Puebloans value that extra bath just about as much as do Westchesterans…er…Westchesterata…er… Westchestierians. Them who buy houses in Westchester.
I don’t appraise for the secondary market anymore and don’t intend to any time soon, but if I remember correctly Fannie and Company would have a complete meltdown if I used sales over 6 months old so I am going to try this with newer sales and see what happens. Then I’m going to add in additional parameters and see if I can figure out what Jonathan is talking about. From past experience it shouldn’t take many stabs to get back to 0 results.
I chose to address this particular issue because it is one that every one of us understands. There’s nothing arcane or esoteric about it. The point I was trying to make was simply that appraisers don’t make large enough adjustments for one versus two full bathrooms. Should the adjustment be 12%, or 10%, or perhaps as little as 8%? Reasonable people may disagree on the number. There is no one right answer that will work for every property in every market every time. What I believe I have demonstrated is that generally, the adjustment to the one full bath house is a lot closer to 10 or 12% than it is to the 3 or 4% I see on most appraisals I have occasion to read.
Todd, I appreciate what you did. And, to an extent I think you showed us that the percentage adjustments are nothing more than guides. Although, appraisers who still do URAR work tell me that the percentage guides are as much gospel to the clients as they ever were. The messages I got from your article and Jonathan’s caveat is yes, bathrooms are important; and yes, adjustments must be supported; but even so, buyers in the one-bath market may not be able to compete in the two-bath market. As you can see from my local example, I came up with a supported adjustment to compare two baths with one of 40%. Notwithstanding Fannie’s guides, if I adjusted 40% for 10 SF room with plumbing fixtures how could I explain that I wasn’t actually comparing an apple with an orange? But, once again, I’m reminded to be very careful about thinking I’m sure until I’ve looked at everything from at least both sides. Good job. Keep bringing it.
I don’t buy the argument that the 2nd bath is worth $60k. I spent quite a few years buying old houses, renovating them and flipping them. We did high quality work; not the stereotypical flip. We could put in a full basement bathroom for about $15,000. We would frequently do this if the property only had one bath simply to open ourselves up to a wider potential demographic but we certainly never got or would expect a $45,000 profit on our $15,000 bathroom.
A one bathroom home is typically something owned by a lower income person/family and the quality of the entire house is almost always much lower than that of a two bedroom house. Also, most one bedroom homes are much older than two bedroom homes because in the 1930’s people didn’t expect to have more than one bath in a home. I think there are a lot of variable to be considered here.
OK, thanks Real Estate Agent.
This is the very discussion we need to have. Actual cost of the improvement is 1/4 of the market value, overall quality of of one bath homes is less. 1 bath homes are older and 1 bath buyers can’t afford a 2 bath.
We known the year built is similar,but what about location? Are the neighborhoods different too?
But wait, if you added the 2nd bath to expand the market opportunites didn’t it have the effect of excluding 1 bath buyers from the market or were you tapping high end 1 bath and low end 2 bath buyers?
Most of the newer homes in my market (Scottsdale, AZ) are built with at least one full bath per bedroom and usually at least one addition bathroom as the “powder room”. I also see more of a demand for all bedrooms to be set up “suite style” with a connected full bathroom. I can remember growing up sharing one bathroom with my two brother and sister. Now days lifestyle demands more. Is more better? lol
So, the consensus is leaning toward anything more than 1 bathroom in a 1500 – 1900 3 br SFR is sort of a luxury? Or at least multiple full bathrooms are not affordable to an identifiable group of buyers who for some reason haven’t joined the Scottsdale lifestyle?
What some of those making comments seem not to realize is that the $60,000 adjustment I am suggesting is to a sale price of $500,000, an adjustment of 12% of the sale price of the house with only one full bathroom. I am willing to concede that the appropriate adjustment in my market may be as little as $50,000 (10%) or perhaps even as low as $40,000 (8%).
For those readers in lower priced markets, it might be useful to consider the percentage adjustments rather than the dollar adjustment. If my analysis in Westchester holds true for houses where the median price is, say, $300,000, then the adjustment for that lower priced market might be something like $24,000 to $36,000.
So, houses here sell for 1/5th of the average price in Westchester. The Westchester bath adjustment is 12%, so my bath adjustment is 1/5th of that or 2.4% ($12,000.00). The bottom line makes more common sense than what my market says (49%) although a reviewer would likely turn completely inside out if I did that way. Reversing the process; if you applied my results to Weschester the bath would be adjusted at $300,000.00.
My last post makes no sense. I’ll try to say what I meant to say. Homes here, within the established independent variable ranges, are selling at 1/5 the cost of Westchester homes, yet homes here with a second bathroom sell for a 50% premium. Should appraisers here just use the Westchester % to pass review? Funny thing, I think the 12% or so makes sense here, but crunching the market data doesn’t support 12%. What is going on?