Helie Rock, R(S)September 1st
Uncategorized

What is an Extra Bedroom Worth?

If you’re expecting a third child, another bedroom may be a family necessity and the only real questions may be: can I afford to build the addition and can I obtain the permits.  However, if you’re wondering what financial value another bedroom may add to your home or if you’re potential buyer analyzing the upside […]

If you’re expecting a third child, another bedroom may be a family necessity and the only real questions may be: can I afford to build the addition and can I obtain the permits. 

However, if you’re wondering what financial value another bedroom may add to your home or if you’re potential buyer analyzing the upside potential of turning a modest sized home into a larger one, then “what is an extra bedroom worth?” is the real question. In this blog post I focus on adding a fourth bedroom to a three bedroom home in various San Francisco and Marin communities.  The question is more clearly stated in two parts:

  1. How much does a fourth bedroom add to the value of a single family home in San Francisco and Marin? 
  2. Is there a value premium for an additional bedroom over other use of the same amount of space? 

The Caveats

  • There is no doubt that these questions can be more accurately answered on a case-by-case basis, but this article aims at some important findings using average sale prices. 
  • Of course estimating future value is an inexact science. This is no more true than for a potential home improvement. 
  • The challenge is to find sale price data that isolates a single change — three bedrooms to four — while keeping everything else constant, e.g. square footage, views, parking, etc. However, in San Francisco and Marin, one seldom finds such data. Our housing stock is just too varied.  
  • Without “pure” comparative data, one must average a substantial number of home sale prices of both three and four bedroom homes to try to “smooth out” the differences in square footage, lot size, etc.
  • I analyzed sale price data on a square foot basis to allow for an easier comparison between different sized homes, but the per-square-foot approach often introduces a bias. On average, a four bedroom home will have more square footage than a three bedroom home. It is generally understood that dollar per square foot value for a smaller home is usually higher than for a substantially larger one holding all other features and amenities constant. In other words, if a 2500 sf home in Ross or Pacific Heights costs $1,000/sf or $2,500,000, a 3500 sf home next door with the same appointments and view sitting on the same size lot will likely cost less than $1,000 sf  ($3,500,000). There is a minimum price for purchasing a home in any neighborhood that doesn’t multiply at the same per-square-foot rate when the home is substantially larger.  This is largely due to certain economies of scale. 

 

SINGLE FAMILY HOME – PRICE PER SQUARE FOOT
July 1. 2009 – August 31, 2010
 

San Francisco: Pacific Heights, Cow Hollow, Marina, Presidio Heights
3 Bedroom Homes: $842/sf
4 Bedroom Homes: $827/sf

San Francisco: Noe Valley, Glen Park, Castro, Corona Heights
3 Bedroom Homes: $672/sf
4 Bedroom Homes:  $648/sf

It turns out that on average there was very little difference in value per square foot between three bedroom and four bedroom homes in these City neighborhoods. If anything, the findings may reflect the bias I referred to above  I ran the numbers for an earlier period (7/1/06-8/31/07) and found similar results. Therefore adding a fourth bedroom in, say, Pacific Heights should increase the value of a home on average by $827 to $842/sf — the basic value of the additional square footage space. There doesn’t appear to be an extra “bedroom premium” under these facts.

Tiburon showed fairly similar results:
3 Bedroom Homes: $686/sf
4 Bedroom Homes: $683/sf

San Rafael as well:
3 Bedroom Homes: $447/sf
4 Bedroom Homes: $415/sf

A look within its city limits Mill Valley showed a different result.

City of Mill Valley (not incl. county neighborhoods)
3 Bedroom Homes: $563/sf
4 Bedroom Homes:  $606/sf

It appears that Mill Valley buyers were willing to pay a premium roughly on the average of $43/sf ($606 minus $563/sf) for the fourth bedroom. The $43/sf amount is in itself not important except as a rough gauge of additional value in a four bedroom Mill Valley home. Note that this premium may have been even higher if you factor in the per-square-foot bias discussed above. This finding indicates that a substantial number of Mill Valley buyers were motivated to purchase homes that had the additional bedroom and is perhaps a comment on the demographics of the Mill Valley buyer and on that buyer’s pocketbook.

A bedroom premium also showed up in the sale prices of homes in the Sea Cliff, Lake, Jordan Park and Laurel Heights neighborhoods of San Francisco:
3 Bedroom Homes:  $656/sf
4 Bedroom Homes:  $701/sf

An even larger bedroom premium was found in sale data for these neighborhoods for the earlier period of 7/1/06 through 8/31/07.

Conclusions
The figures in this study are merely rough guides. They tell a story of relative economic facts, not absolute dollar amount conclusions. They are the result of averaging data. A specific home’s value may be below, at or above the averages shown.  And you should know that the analysis of adding a third bedroom to a two bedroom home may yield vastly different results.

It’s generally understood that in the City and Marin, if you can obtain the building permits and the financing, you should benefit financially from the addition to your home of any well planned space to the extent that the total cost per square foot of government approval, construction and financing falls below the home’s value per square foot. However in certain neighborhoods the value of adding a bedroom may contribute a significant amount more to the value of your home.    


Posted in Uncategorized .

About the Author

Helie Rock, R(S)

Helie Rock, R(S)

Stay Connected. Join the Conversation. Follow McGuire Real Estate.