Posted by Jonathan J. Miller -Wednesday, December 22, 2010, 9:49 AM
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?