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By Dima Williams
February 6, 2021
What Really Impacts a Home's Price, house on a calculator
Martín Elfman for Money

Home prices shot up in 2020 and many experts expect them to continue climbing. While this growth is largely driven by limited inventory amid a national homebuying frenzy, there are many individual factors that determine a home’s value.

“Some of the most substantial factors that affect the property [price] are about the property itself, such as how big it is, how many bedrooms, how nice it is,” said Taylor Marr, a lead economist with real estate brokerage Redfin.

Ultimately, local home prices move up or down depending on the disparity between the number of residences listed for sale and the number of buyers looking to make a purchase. Yet, desirable home features and a favorable location command top dollar in any housing market, whether it is on the upswing or spiraling into a doldrum.

Differences in square footage, the number of bathrooms and proximity to neighborhood amenities all help explain why a home may be worth thousands of dollars more — or less — than a property just down the road.

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Comps: how real estate agents really come up with a list price

Motivated by sentiment, homeowners may assign a high value to their property. Real estate agents, however, have an objective method of coming up with home prices. They compare the house to similar properties that have recently traded hands nearby. In the industry, this emotion-free process is known as comparable analysis — or comps.

An ideal comp might be a house in the same development with an identical floor plan, however, homes do not have to be exactly the same to be included in the analysis. Typically, agents as well as appraisers, consider properties of similar size and style that are located in the same school district or community.

Depending on how brisk the housing market is, agents may only consider homes that have sold in the previous 30 days. If sales are rare in a given neighborhood, they may have to count residences traded up to a year or two earlier.

“It’s all about the comparables at the time,” said Michael J. Franco, real estate agent with brokerage Compass. “When there’s been a steady market, it’s easier to price.”

During the pandemic, the housing market has been anything but predictable with a severe decrease in listings. While this initially made comps hard to find, the recent boom in sales is now providing agents across the country with at least six months of pricing data to work with.

Why is my home worth less (or more) than my neighbor’s?

You have space for a home offices

Due to the work-from-home trend that the pandemic has accelerated, buyers are increasingly prioritizing having a dedicated work space. In July 2020, more than 20% of home shoppers responding to a survey by real estate firm realtor.com indicated that having a home office was important to them. Although the home-office price premium has somewhat deflated as more and more agents highlight rooms suitable for working from home, residences with a home office are generally selling for about 3% more than those without one, according to a 2020 data analysis by realtor.com

And, while home offices now top the list of most desirable features, their conventional arrangement in spare bedrooms raises the usual question whether having more bedrooms translates into higher home prices.

The fact is that unless the square footage of a home proportionately grows with the number of bedrooms, having more bedrooms may not result in a higher home price, said Jeff Tucker, an economist with Zillow. That is because the more bedrooms an average property boasts, the more likely it is that they will be modest in size.

Quantity of bathrooms is more important than quality

If bedrooms are not always price boosters, what can actually raise home values are bathrooms. If an average-sized home has a disproportionate number of bathrooms to bedrooms — say, three bedrooms and only a single bath — adding one more bath can drive the price up thousands of dollars.

A study by ibuyer Opendoor, shows that one more bathroom can boost a home’s resale price by 6%. This “makes a lot of intuitive sense,” said Tucker.“Nobody has to wait in line for the shower or the bath.”

However, remodeling an existing bathroom — or any other rooms, for that matter — has a smaller influence on a home’s sale price, even if renovations are a popular strategy to prop-up the asking price. A full bathroom remodel, according to Opendoor, increases price by about 4%, while a kitchen overhaul generates a 5% premium.

“An updated kitchen or a remodeled bathroom will have somewhat of an impact but that return on investment can be pretty uncertain,” said Tucker. “This is mainly because when you remodel a kitchen, while it might match the owners’ preferences, once they put it on the market, some buyers will like what they did with it and some won’t.”

Pools and other high maintenance add-ons can be tricky

Similarly to an idiosyncratically upgraded kitchen, unique features such as a pool or an elaborately landscaped yard do not always rake in the cash homeowners may hope for. Such bells and whistles often carry high maintenance costs that can dissuade some buyers, said Kris Lindahl, CEO and founder of real estate brokerage Kris Lindahl Real Estate.

“I’ve seen times where a pool has increased value and I’ve seen times where it’s played no factor,” he said. “And I’ve also seen times where it’s decreased the value.”

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Why is my town more expensive than the next one over?

How are the schools?

A 2017 analysis by the New York Times found that a 5% improvement in test scores can increase home prices by 2.5%.

“Everyone is buying around school districts, whether they have kids, grandkids or other family members that are kids,” said Lindahl. “They’re all buying around that because they know that the house will hold [value at] resale.”

Can you walk to a grocery store?

Moreover, residences near popular grocery stores also command higher prices. For instance, homes in zip codes with at least one Trader Joe’s realize a 5-year price appreciation of 35%, according to real estate data company ATTOM Data. That’s slightly higher than the national average.

Or a neighborhood park?

While they have always drawn families, parks have grown in popularity as convenient and safe outdoor retreats for home-bound workers during the pandemic.

In a review of 33 studies, Texas A&M University Professor John L. Crompton concludes that properties directly across the street from parks can command a price premium of 8% to 10%. He cautions, however, that potential downsides like traffic and litter can flatten the value bump and shift the largest price premiums to homes that are several blocks away.

According to a Redfin report from 2020, properties within walking distance of shops, parks, schools and other amenities sell for roughly 24% more than similar homes in car-dependent areas. Moreover, one extra point in a neighborhood’s walkability score equals $3,200 more in home value, said Marr.

“The old adage in real estate is location, location, location,” he said. “It really is location that kind of trumps everything else with how expensive properties are.”

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