Why didn't my outhouse add value?!
Today we'll apply a thought experiment that you can use when considering adding features to your home to understand why some improvements add $0 of value, and few ever add more than $1 per $1 spent.
Imagine a typical home, in a typical neighborhood. For sake of argument, we will imagine a $250,000 home that is 20 years old, in good overall condition with 2 and a half baths. Imagine the outhouse above being built in the back yard. Brilliant Japanese style construction, plumbed into the city sewer. How much would this cost?
It would likely be costly, with special cedar materials, specialized construction, permits, etc. How much would it add to the value of the home?
Lets say for argument's sake that you are able to have a builder quote $20,000 for the job in total. How might we approach the value consideration? You certainly won't find another, so a "comp" is out of the question.
Within the "cost approach" we have a few tools we can apply, first, how much has the structure depreciated. In our case, the structure is brand new, so 0%
A second question is functional utility, in other words, how many days per year will this be used by the typical buyer? Perhaps, once, for an Instagram post... and then never.
That would imply a 1/365 or .27% utility. That would indicate a value of $54.60.
Why do pools cost so much and provide so little value? The same for fireplaces and decks? Again, we can apply the same tools: How many years, of its total life are left? How many days in a year is it "used?"
Pools are often used no more than 4 months of a year, perhaps 6 if they have a heating system (increasing the cost), thus a 33% to 50% utility. Once age is calculated into the consideration, we see why these return so little in comparison to their cost. Similarly with decks and fireplaces. Conversely, this is why kitchen and bathroom remodeling often return a higher value, because their utility is at or near 100%.
This is what I would call a "quick and dirty" cost approach way of thinking about value, that you can use when considering what improvements to make to your home.