The Value of Modernization

A buyer recently asked me the question as to whether an updated home had more value than one which hadn’t been updated. Specifically, his interest concerned updated electrical wiring, plumbing, windows, and updated kitchen and bathroom fixtures. My response was:

From a theoretical point of view, the cost approach estimates the reproduction cost to create a duplicate improvement as if it were new. The depreciation present and observed is then subtracted and finally, the value of the land is added. However, from a more practical standpoint, replacements cost estimates are the standard used today. The difference between the two is significant in that replacement cost relies on current building practices rather than the sometimes more expensive techniques found in many older homes and buildings.

As to the hardware or the extent to which an older home has been well maintained or modernized, those items do become critical in determining depreciation. As an example, if you had two identical homes build in 1900 situated next door to one another. In both instances the actual age of each home would be 109 years. Now , in this example, let’s assume that one home had been updated with new electrical wiring, new plumbing, a modernized kitchen and new windows while, except for the roof having been replaced several times, the original components of the other home had just been well maintained and are in good working order. In this example an appraiser would say that the effective age of the modernized home might be 10 to 15 years. However, the home which had just been well maintained might have an effective age of 25 to 30 years.

The issue here is maintenance and modernization extends the life of an improvement. So, to answer your question directly, yes those updated components both extend the life of that home and decrease the amount of depreciation which would be subtracted from the estimated replacement cost; again adding value to the property.

Another point, most insurance companies have become totally paranoid of older homes which do not have updated electrical wiring beyond new electrical panels. The insurance companies are, in many instances, totally unwilling to bind coverage if it can’t be shown that the original knob-and-tube wiring has been replaced. Again, that is a distinct advantage of a homebuyer considering the purchase of an older home.

The point here is, if you are buying a home which lacks updates which would be considered common to the marketplace where you reside, that home is worth less when compared to a home which already has those updates in place. However, do beware of homeowners who have done the update work themselves. I say this not as a knock on those who wish to benefit from sweat-equity, but more from the point of view that some owners do work which is beyond their capabilities or experience. Electrical wiring and plumbing might fall into those categories. Buyers do need to be aware of what they are buying.