1/3 -2/3 Rule

In real estate, there are many "rules" that are used.  One we will talk about today is going to be the rule that real estate appraiser uses to help value to improvements to a property.


One of the top questions I am asked is, it I do an improvement will that increase my home value.  The short answer is yes, but generally not what you are paying to do said improvement.  Given that your home is in the same condition that everything else is in your neighborhood, you are only going to get about 1/3 to 2/3 of the value added to your home.  

Why are you not getting a full value of your improvements?  Simply because they are used and people are likely not willing to spend what you spent unless the have the very same taste or ideas as you.  

Case Study #1.

Me and my family like having fresh fruits and vegetables.  So much so we spent the money to build and irrigate a garden in our backyard.  We are also looking to add a fruit tree shortly as well.  All in all for the tree and the garden, dirt, irrigation etc. we will have spent roughly $1,000.  Now does that mean my home is now worth $1,000 more. I wish but unfortunately not.  Most people would not care if it had a garden or not. Nor would they pay $1,000 more for my home verse the one across the street identical to mine without the garden.  So what about the 1/3 -2/3 rule?  In this situations, not everyone is going to really have added value because of my garden.


Case Study #2 

Many of the homes in my neighborhood were built around the same time and all have the same general condition builders grade kitchens.  If we updated our kitchen with granite counter tops, top of the line stove, oven, and dishwasher and we spent $9,000 that still will not increase the value of our home by $9,000.  However, because our home is better than those on the market people on average will be willing to pay somewhere between $3,000 to $6,000 more for our home.

Think about it.  If someone was offering a $9,000 car would you buy it for $9,000 if you really didn't need one?  Likely not, but what if that $9,000 car was for sale for $6,000?  Maybe and some of you all would because you are getting a deal for $3,000 off.  If that same car was only $3,000 many more of you would buy it because that is a steal of a deal.  You are getting $6,000 more in value for only paying for $3,000.  That same principle is what drives the 1/3 - 2/3 rule of improvements to your property.


Case Study #3

So if you just put a new HVAC system in your home because yours finally died and spent $9,000 on it then that would mean your home value went up by $3,000 to $6,000 right?  So not exactly.  Things such as roofs, HVAC systems garage doors and other items that are required for a home, typically will not add value, unless they are truly an improvement and higher than those in your neighborhood.  If nobody else had a high end, energy star rated HVAC system then you could add some value to the home.  Same with adding a metal roof, this could add value if you are the only one in the neighborhood with one.  These are not absolutes though because you would need to take the rest of the neighborhood into consideration and what the buyers are seeing as added value.


The moral of this story is, if you have all things equal, any improvement to your home, will likely only net you 1/3rd to 2/3rds the price you paid.  So if you make an improvement to you home, don't make it to increase the value, but make it because if will make you happy to live there.