Converting A Garage To Living Area - How Much Value Does It Really Add?

An investor called this past week with the following question. They are looking to purchase older homes in south Scottsdale AZ and convert the garages to living areas. They want to know how much it increases the value of the home.

 

Common View of Price Per Square Foot

Most homeowners look at home value as:

Home Value = Livable Sq Ft x Price Per Square Foot

This is a generalization and works as a rough estimate when comparing homes in the same neighborhood with similar features (pool, yard size, landscaping). However, the actual home value calculation is much more complex when it comes to appraising your home.

How Appraisers Determine Home Value

First the average price per square foot of a home has several elements to it. It includes the home, the garage, the amenities (landscaping, fences, pools, patios, etc.) as well as the land the home is located on.

Home Value = Site Value + (Livable Sq Ft x Price Per Square Foot)

In south Scottsdale AZ the land typically accounts for well over half of the total value and in some cases it can account for over 75% of the total value. I ran an analysis for the area this investor was talking about, by searching the MLS for homes built between 1950 and 1980 on sites between 5,000 and 10,000 sq ft and to keep it simple, eliminated homes with pools.

The results were an average sales price of $604,711 with the average home having 1,554 sq ft and an average site size of 7,000 sq ft and all had either 1 or 2 car garages. The average sales price per square foot was $396.37.

Determining Increase In Value For Garage Conversion

To determine the increase in value for converting the garage to living area, the first thing you have to do is determine the site value. This is more difficult in areas where there are no site sales so it has to be done based on depreciated cost as shown below.

The market extraction method for determining land value is the sale price adjusted for market conditions (appreciation, depreciation, concessions) less depreciated cost of the home, depreciated cost of the garage, patios and landscaping with the residual value being the land.

The example below is of the most recent sale that is as close to the average size and average sales price as possible:

• Sale price $640,000 that sold in the past 10 days so no adjustments were needed for market conditions.
• The home was built in 1959 but had been remodeled with an effective age of 15 years which equates to 25% depreciation.
• The home has 1,796 square feet of living area and the cost to build per cost manuals would be $303,703 less 25% for a depreciated value of $227,777.
• It has a 440 square foot garage with a cost to build of $26,110 less 25% for a depreciated value of $19,582.
• The other depreciated cost include the patio, fence and landscaping which would have an approximate as is value of $20,000.
• The estimated land value would be $640,000 - $227,777 - $19,582 - $20,000 = $372,641.

Therefore, the amount of the price per square foot that can be attributed to a 1,500 square foot home that sold for $600,000 would be the $600,000 - $372,641 (land value) - $19,582 (depreciated cost of garage) - $20,000 (as is value of site improvements) = $187,777 divided by 1,500 = $125 per square foot.

Regression analysis and paired sales also show an adjustment of $100 to $125 per square foot for differences in gross living area.

But there is still more to consider.

• Converting a 400 sq ft garage to a living area would increase the value by $50,000.
• But you would also have to consider that the home would no longer have a garage and because market data indicates that in the $600,000 price point buyers are willing to pay $10,000 to $15,000 per space for a garage, the increase in value would have to deduct the value of the garage.

Therefore, if you were to convert a garage into a living area, in the area in question, the overall value of the home would likely only increase by $20,000 to $30,000. Not $160,000.

If you have a question for "Ask The Appraiser" send us an email at: steve@masterappraisalservices.com

 

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