Hello everyone and Welcome to episode 78
of Selling Greenville your favorite real
estate podcast here in the upstate of
South Carolina I'm your host as always
Stan McCune realtor right here in
technically Greer South Carolina as
you guys have heard me say before but
regardless it's all the same Greenville
County South Carolina I'm your
host as always and all of my contact
information is in the show notes if you
need to reach me for anything with
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that and I thank you guys that have
already done that today we are going to
be talking about smaller homes
specifically smaller houses but smaller
homes just in general how in a sense
smaller homes are a better investment in
a lot of different ways than larger
homes are now I want to preface this
right off the bat okay because there are
there there's one very important thing
that we need to get out in front of
because I myself actually to me the
house that I live in is pretty big it's
like 3,800 Square ft when you factor
in our completely finished
basement so I am certainly not against
being in larger homes and this is
where there has to be some kind of bance
in discussion between lifestyle and
investment and we've talked about this
in other episodes but I just want to
bring it up very briefly here at the
beginning just to make sure that you
don't misunderstand me I'm not saying
that you shouldn't buy bigger homes but
what I am saying is that smaller homes
do tend in the long run to be a better
investment now investment isn't the only
consideration when you're buying a house
for your family I remember reading
Warren Buffett talk about how it
actually would have been better for him
in the long run if he had rented versus
buying his house that that he raised his
his family in but that he had no
regrets that he felt like owning the
home that he purchased and that his
family his children grew up in that
that was a great lifestyle decision that
was a decision where they they made
memories and and and even if he may
have lost money he gains so much more
that was much more valuable than money
in that decision and sometimes the
best lifestyle choices the best
lifestyle decisions are not necessarily
the best investment decisions and so you
need to weigh that if you're looking to
move don't just
automatically go fully on one side of
the spectrwhere you're completely
focused on lifestyle you're not thinking
about the investment side of things but
if you're more future
oriented and and a lot of us are
investors tend to be more future
oriented if you're more future oriented
and you're thinking more on the
investment side of things don't forget
don't defer all of of life's Joy To The
Future there are some things in the
present to be enjoyed and sometimes
if you defer your joy to the Future you
never get to actually have it you you
end up never getting to see that Joy
the only thing that we're guaranteed is
today and I'm getting a little bit
philosophical here but my point is
that my point is that
the fact that some homes are better
Investments than others doesn't
necessarily mean that that's the home
that you want to purchase you know what
the best investment is right now it's to
to purchase a home in a transitional
neighborhood that is seeing 20% year-
on-year appreciation
even prior to co well guess what most
people don't want to raise a family in a
transitional neighborhood they tend to
be higher crime you know they tend to
to not have as good of schools there's
all sorts of different things that
people will will say about these
different neighborhoods and that's fine
I I can't steer people one way or the
other that's just the feedback that I
get from people when they are looking at
at the different neighborhoods that
they're looking at but at the end of
the day most people don't choose the
best investment for their own home and
that's totally fine but I do think it's
helpful to consider to look at the data
and to
consider what the market says and and
how all of this works how the different
Dynamics work in terms of of how it
plays out in the long run from an
investment side of things when you
purchase a house so on to the episode
here that smaller homes in general are a
better long-term
investment than larger homes are now
we're just going to start with some
some
very I shouldn't say basic things
actually the this is probably the more
complex things but more in the weeds in
terms of of the real estate side of
things smaller homes tend to appraise
and sell for a higher price per square
foot than bigger homes so they tend to
both appraise for not a higher price
total not a higher price total but a
higher price per square foot than bigger
homes well why is that well there are
there are two reasons for that I want
you to think of of a
neighborhood just in general picture a
neighborhood in your mind and think
about what the smallest home in that
neighborhood is right the smallest home
in any neighborhood has there is a floor
basically to what a neighborhood will
sell for and that floor is generated for
a variety of
reasons the Baseline is generated for a
variety of reasons but it comes down to
location right every
neighborhood based on its location and
as well of course based on the quality
of construction all these different
things has a baseline that no home will
ever sell below my neighborhood that
Baseline right now as I'm recording this
is about $200,000 there will never be
a home that comes for sale a house that
comes for sale barring some kind of
weird economic you know recession or
something like that but no home in my
neighborhood that has three bedrooms and
two bathrooms will ever sell below
$200,000 that is the floor that is the
Baseline and that's simply because this
I'm in a part of Greer that's very
Central to everything it's close to to
85 it's close to 385 you can easily get
to Spartanburg you can easily get to
downtown Greenville great great
School District Riverside School
District you know accessible to
everything so and the the
construction quality in my neighborhood
Pretty good overall homes that aren't
that
old has a pool in the neighborhood all
these different things contribute to the
fact that there is a lot of
people out there looking for homes that
check off all of those boxes so this is
where we talk about Supply and demand so
the demand for a home in my neighborhood
is tremendous and that demand means that
really no matter what size so we had
something like a 12 or 1300t house in
the neighborhood the past year sell for
a little bit over
$200,000 well that's a very small house
for this neighborhood there's not very
many houses in my neighborhood that are
that small
and on the flip side you'll see
other homes that are much bigger that
might sell for 225 or
230 and so the price per square foot for
that 1,200 square foot house is much
higher than some of these other homes
well think about it from this standpoint
right you've got the living room you've
got the two be the two bathrooms the
three bedrooms the kitchen the dining
room that is the stable and and of
course whatever backyard that is the
stable
layout I should also mention a garage
almost every house in my neighborhood
has a garage but those are are the
staple things that people are looking
for right so what's the difference
between again in my neighborhood the
difference between a 1200t house and a
16 or 1700 square foot house there
aren't more rooms they're just bigger
right the living room is a little bit
bigger the kitchen's perhaps a little
bit bigger the master bedroom master
bathroom is a little bit bigger perhaps
the yard is a little bit bigger so that
square footage that you add of course
not to the yard but the square footage
in the house that you add it doesn't
fundamentally change what spaces are in
the house it just
changes how those spaces are laid out
and how large they are well someone is
going to be willing someone is going to
be okay there is someone in the market
that's like you know what I don't care I
don't need a very big master bedroom I
don't need a very big master bathroom I
don't need a huge living room I don't
need a huge kitchen but I need all these
other things that that this neighborhood
provides that great School District that
accessibility to everything that the
fact that it's a newer home doesn't need
a bunch of Maintenance those are the
things that I need and so that is what
ends up driving the price up the
price per square foot up for these
smaller homes is that ultimately people
are not as worried as long as the home
checks off the boxes they're not as
worried about how large all of these
different rooms
are and so that's what happens we have a
neighborhood the the smallest house in
the neighborhood should almost always
sell for the highest price per square
foot
of in in comparison to the other homes
in that
neighborhood what about appraisals how
how do appraisers handle this well it's
it's not at all the same in terms of
of the logic behind it but it comes to
the same outcome appraisers handle the
adjustments on smaller homes in a way
that really favors the smaller homes now
what are adjustments all right when when
a appraiser looks at a house they will
will take that house and they'll they'll
basically have a bunch of categories
for that house and and you know all all
the different finishes and the condition
of it and and the location all these
different things they're assessing the
house by then and and of course the size
is one of them then they have the comps
they have at least three comps sometimes
more than that that they are comparing
that house to all right so you take the
subject prop property which is the house
that we're looking
at that has 12200 ft well there are no
comps that are 1200 square ft so we have
to use comps that are 1,600 1700 square
ft substantially larger than this
home how do they handle that they
have to adjust and so they will make
basically they will take the price
that those homes sold for so let's say
that those homes sold sold for $250,000
and then they will adjust that price
down basically
penalizing penalizing them in order
to make it an equal playing field
they're trying to make these 16,700 foot
homes to be comparable to the 1200t
homes for the purposes of the appraisal
they're trying to make it a Level
Playing Field in order to account for
the fact that these homes are bigger
than the the subject property okay so
how do they make that adjustment well
here's the weird part right so if we've
got a 1,200 foot home that is for sale
for
$200,000 or under contract for
$200,000 the price per square foot of
that comes out to what 167 roughly
$167 a square
foot well how does the appraiser adjust
the price for the other comps the other
comps are perhaps selling for you know
$130 a square foot well you would think
the appraiser would just deduct $167 or
$130 a square foot per square foot
for the comp so in other words we've got
a comp that let's just let's actually
play this out so we've got for
instance
A600 or a 1,500 foot house that sold for
250,000 oh actually that's that's
exactly 167 all right so we we do need
to change this to 1600 all right so
we've got a a600t house that sold for
$156 a square foot 20, 1600t house
that sold for
250,000 that's
$156 a square foot you would think Okay
so we've got a 1200t house we have a
1,600 squ foot house we need to level
the playing field we know that the,
1600t house sold for the for $250,000 we
need to penalize that house in order to
make it comparable to the 1200t house
how should we do that well the logical
thing would be to take, 1600 minus 12200
that's the difference in size between
the two homes $400 sorry 400 square
fet and now just multiply that times
156 so if we do that
whoops times
156 it'd be good if I could type that
would be really really ideal all right
here we go that that brings us to 62,400
and and so the logical thing to do would
be to deduct 62,000 62,400
from the
$250,000 to make that comp comparable to
the 1200 foot house so that would take
us you know actually in into the 180s at
that
point that to me is reasonable but
that's not how they do it they actually
adjust it's it's arbitrary but they
adjust by you know 30 40 50 $60 a square
foot and it's just kind of depends on
the appraiser and it kind of depends on
their mood and it kind of depends on a
few other things as well so they they
I think I most frequently see
adjustments by like $40 a square foot so
they adjust by $40 a square foot well
well that takes us to $116,000 right
because again the difference between
these two houses is 400 ft so if you say
that that 400 ft is only worth $40 a
square foot you're saying that that the
400 ft is worth a total of
$166,000 right so what that means then
is that that comp that was $250,000 we
just adjusted it and now it's
$234,000 you see just happened now this
1200t house we're actually looking at it
and saying oh actually this 1200t house
is actually worth potentially in the
230s well that that math doesn't make
sense probably the market doesn't agree
with that either but that's the way
appraisers do it well let's take it on
the flip side of of things and I know
this is a little bit hard to explain on
the podcast so I hope you guys are are
following me but let's say you've got
the largest home in the neighborhood so
let's say you've got a well in my case a
3,800 squ foot
home and there aren't very many other
3,800 ft homes in the neighborhood now
you've got the reverse problem right
you've got the appraiser now he's
pulling comps at are 3,00 3100 3200
square feet and so he looks at that
to level the playing field or she looks
said it to level the playing field he
now has to subtract or he now has to add
square footage to those homes and and
basically make an adjustment to those
homes in order to to make it
fair and so let's say that one comp is
700 Square ft smaller than the subject
property and he is or she is only giving
$40 a square foot for that extra square
footage that comes out to
$228,000 let me ask you something how
many people do you know that are looking
for a 3,800 ft house versus and and
wouldn't even consider a 31t house 3100t
house how many of those people do you
think only value that 700 squ ft as
$28,000 none of them do like that 700
Square ft makes a big difference when
you're talking about you know going from
you're going from one tier like 3,000
foot homes to nearly 4,000 foot homes
that's an entire tier jump at that point
you're talking about homes that
oftentimes have a an entire
additional bedroom and bathroom versus
the other homes but and appraisers
are supposed to adjust at least for the
extra bathrooms but they are basically
penalizing the larger homes by how
they do this and of course I complain
about appraisers all the time on this
podcast because they are the bane of
of Realtors everywhere but this is the
part of it where regardless of whether
appraisers
are doing their job or not I do not
understand how they come up with this
math and I don't know if this is
universal across the us or what I just
know that that's how they do it here you
if you're a owner of a smaller home
or if you're purchasing a smaller home
the odds that your appraisal will come
in at the price that it should be is
dramatically greater than if you're in a
large home for your neighborhood that is
just the way it works I hope that all
made so
both to
sellers sellers are willing to pay a
higher price per square foot and
appraisers are willing to appraise at a
higher price per square foot for smaller
homes now we spent a lot of time talking
about really that that first point that
was kind of two points the rest of these
though we're not going to spend a whole
lot of time on because that was kind of
the the the the bulk of of this that you
probably have never fully thought about
or or maybe you have but some some one
in the audience I'm confident has never
fully thought all of that through but
there are other lesser important but
but I should say simpler to explain but
equally important things to consider
smaller homes for instance have cheaper
homeowners insurance by and large by and
large the insurance company when they
look at it they see the size of the home
they are typically going to offer a
lower premifor that smaller home for
a larger home so your your ongoing costs
are cheaper as well in that regard
additionally to a certain extent
property taxes are also going to be
lowered now let me hedge that for a
second that typically in at least in
Greenville County Spartanburg County as
well and and the surrounding counties
really a South Carolina by and large
type of thing typically when you make a
home purchase the county will will
immediately within the next year
reassess the value of your home and and
coincidentally their reassessment will
come in pretty close to what you
purchased the home for so you're not
necessarily going to get a property tax
savings by having the smaller home right
away but where I think it could end up
benefiting you is down the road down the
road as they do there every five year or
however often that they decide to do it
because there is a little bit of an
arbitrary aspect to it but as the county
reassesses just
independently as they're looking at your
home and they're looking at what you
purchased it for they're looking at the
square footage they are less likely to
reassess you at a higher price as they
take all of that into account so you
will probably end up paying less
money for property taxes as well well
due to the fact that it is a smaller
home another very very big thing to
consider and house flippers know this
very well is of course there are
fewer costs associated with updating the
house when it's a smaller house it's a
small house it's got a small kitchen
that's less Granite fewer
cabinets less Hardwoods that you need
to replace less carpet that you need to
replace everything is less it's less
home that you have to paint less roof
that you have to replace all of these
costs you know it's a cheaper AC unit
all of these different things are are
cheaper with a smaller house than with a
larger house and so you're when you have
to make repairs do Renovations whatever
that ends up being cheaper with a
smaller home than than a bigger home
this is perhaps not the biggest thing
MoneyWise but TimeWise and we all know
that time is money TimeWise and
MoneyWise as well it is a lot less
home to clean you're spending less time
cleaning you're spending less money on
cleaning
supplies so you don't I mean trust me
go from a I went from an 1800 foot house
to a 3,800 ft house it's a lot harder
to keep up with cleaning in a 30 800t
house that that is just the reality of
it it's just more home to clean there's
always something to do always something
that needs to be done same thing with
the renovations there's always
Renovations that we can be doing I mean
we could constantly be working on
projects in this house if we really
wanted to and and so that is
something that is is worth
considering as well just the the fewer
costs and the significantly less time
spent cleaning when you have a
smaller home versus a larger home and
this is a little bit Downstream but you
know as I was thinking through what are
what are the different you know
advantages of a smaller
home you have obviously Less storage in
a smaller home than you do in a larger
home and when you have less storage that
means you have to have a lot more
self-control in terms of what you own
terms of the possessions that you have
you can't can't just go out on a
shopping spree and buy you know $1,000
worth of clothes where are those clothes
going to go you don't have as much house
to
decorate you don't have as many walls
to hang things on so there are in
addition to Simply the raw things
related to the house updating the house
cleaning the house and all of that you
kind of have fewer costs in in theory in
terms of other things that you buy as
well because you don't have as many
places to put those things right now of
course here's what often times happens
people that have smaller H smaller
houses they end up never parking their
car in the garage because then their
garage ends up becoming a basically a
giant closet and I'm sorry I'm sorry if
if that's you I went for a long time
without having a garage I have one now I
like it I like being to park my car in
the garage and I and I highly
recommend it but I get it if you're in a
smaller house maybe that's that is the
sacrifice you can't make you have to
have there's a certain level of worldly
Goods that you must have in your
possession and the house can't fit
them all but the house plus the garage
can sorry car you got to be out there
and hope that a hail storm doesn't come
along and ding you up but that is
potentially I say potentially
potentially a way that someone might
save money in a smaller house is that
they have to be have a lot more
self-control in terms of what they buy
and and what they have because of
storage concerns and I have heard this
from from people before I do know
people that literally they back off on a
hobby that takes up a lot of space
because they are out of space to support
that hobby and so that's that's a
very real thing again to bring it all
back
in it's not wrong to buy a big house and
it's not irresponsible to buy a big
house you have to look at your lifestyle
and determine what lifestyle do you want
what lifestyle do you want for your
family what makes the most sense for you
and your season of life it may mean
buying the biggest home in the
neighborhood it may mean buying the
smallest home in the neighborhood
but in terms of the investment longterm
buying the smallest home in the
neighborhood does pay off long-term in
ways that buying the bigger homes do not
that is just the reality of the
situation and that is the reality of
this podcast and the end of this podcast
and I appreciate you guys listening
please subscribe to the show if you
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all of my wonderful contact information
is in the show notes if you need to buy
a house if you need to talk real estate
if you need anything real estate
related let me know I'm happy to help
you happy to chat hope you guys have a
great rest of the week if you're in the
Northeast I hope that you don't have a
hurricane about to hit you CU we had
that tropical storm that came up here
dumped a bunch of rain on us had some
weird weather had a lot of tornadoes
but thankfully we were all safe I hope
that for all you guys in the Northeast
that are listening and for all you guys
down here that are listening hopefully
we'll have just some nice weather as
we transition into the fall here in the
next few months but thank you guys for
listening stay safe have a great rest of
the week
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