speaker-0: Being able to train your mind to evaluate in layers of depth, almost like an onion, you know, it's like there's there's layers and every layer reveals something different. But even though every layer reveals something different, you're also looking at it from a different perspective. And you have to teach yourself how to assess in that regard so that you aren't ruled by one value over the other, because they do. They'd work better together. Welcome to Return on Design, the podcast where beauty meets strategy and interiors become assets that perform. I'm your host, Rachel Niederhofer, designer, investor, and builder of high-impact spaces that deliver real results. Alongside my husband, I run both a design firm and a real estate investment company, where I live at the intersection of creativity and ROI every day. Each week, I'll be unpacking what most people overlook, how strategic design decisions can grow your investment, elevate your lifestyle, and unlock the full potential of your property. You'll get real tools, proven strategies, and unfiltered conversations with industry experts who are doing it right. So if you're ready to invest with purpose and leverage design as a powerful tool, this podcast is for you. One of the biggest misconceptions about real estate is that value is objective. People often assume, you know, that a home is valued at what Zillow says or what the appraisal came back at. And I really just don't believe that to be true. There's really two types of value when it comes to residential real estate specifically. And that is a perceived value and the real value. And if we can figure this out. As investors and designers and even homeowners, this can actually level up our strategy.

speaker-1: Yeah, I agree with that because, you know, as investors, we're taught to look at ⁓ you know, purchase price and rehab cost, cap rates, all of which is very important. But in the housing market, people aren't buying spreadsheets, they're buying a feeling. How does it home make me feel along with what do I see as actually the

speaker-0: Which is exactly where return on design comes in. I mean, this is where we live. It's around the concept of how design can be leveraged to influence value on both real value and perceived value. So, welcome back to the show. Let's dive on in. So, let me just pose the question to you, Justin. What is the most important? Would you say real value or perceived value?

speaker-1: I don't know that you can actually say one is necessarily fully more important than the other. I think it's a combination of the two. Yes, real value matters. What's there? What because the real value is the things that are actually there. You know, this home has, you know, five bedrooms, it has a, you know, very luxurious kitchen, it has large rooms, great space, great outdoor space. Those are things that are real and tangible. And that's the real value in things, you know. What are the finishes? Perceived value is where the emotion gets drawn in. And that's how does this make me feel? Can I envision the home with my lifestyle and and moving forward? You know, then newly married couple looking at a at their first home together and it's ⁓ I can envision us raising our children here. Those are th those are perceived values. The great time that we can have sitting on the back porch watching this beautiful sunset. in the yard. Those that's a perceived value. The real value is again the things it actually has.

speaker-0: Yeah. So just to dive a little deeper for context, real value is think about it in terms of what's the actual square footage. How is the square footage allocated? Like to how many bedrooms, how many bathrooms, how many living spaces, what is the actual finished material and the actual land size, things that you can actually quantify.

speaker-1: You can make put pen to paper with.

speaker-0: That becomes your real value. And there's a cost associated with the real value. And then the perceived value, even against real value concepts, is yes. How is it make me feel? Is it going to work for my life, for my family, for my goals? And in addition to that, do I like the finished selection of the real value? Because even though there's a cost associated with it. If I don't value that cost from a perceived aspect, you're head on now between real and perceived. And ultimately that perceived value is going to point to the actual offer.

speaker-1: And I'll take that even further. It's a if if you're comparing two homes, you know, we'll go back to the five bedroom. Okay, they both have five bedrooms, they have roughly the same square footage. You know, the perceived value in why one's gonna sell for a higher price than the other, if if all things in them are are equal, the thing that's gonna drive the higher price on one versus the other is that perceived value of what is the layout. How does that fit with my lifestyle and my function and form? You know, as we've talked about so many times, it's the flow, the function, the form that drives so many things. You know, I can see that that works or I feel like I'm fighting this one. So I don't like this one versus this one.

speaker-0: Which plays into that emotional return that design should be producing. Absolutely. And the experiential return. Mm-hmm. Which we've tapped on in, you know, talking about short-term investments and creating that experience that drives and evokes that emotion. Which is really fascinating because if you think about it, people experience things differently from all aspects of life. We're we're that unique as individuals that we could eat the same dish at a restaurant and how we experience that can be completely different. It's the same concept when it comes to real estate. Yeah. And how someone experiences the space or whatever their expectation is can be totally different and therefore be the driver of that perceived value. Exactly. You know, by nature, humans, I mean, we're just like emotional beings. Typically, that's what people are relying on to make decisions. And I remember my dad growing up used to always tell me what when I would get upset or I would say, I feel like, you know, fill in the blank. My dad would always say to me, Feelings are fickle, Rachel. And I still carry that with me today because it is such a truth, not that you shouldn't you know, weigh on how you feel or or what it indicates consideration. There you go. That's a better way to say that. But yes, your feelings can change throughout the cycle of your life. And yeah, we'll we'll dive into that a little further in the episode of how to actually evaluate a space that's not fully ruled by emotion. But when it comes to perceived value, that is typically the the dominating motivator there is how is it How do I feel about it? How does it make me feel? Or to your point, how can I experience this this space with my life, especially when you're viewing a home that, you know, is being occupied by people that live there? It can often be ⁓ distracting for people to resonate with the space because you have to kind of compartmentalize it looks this way right now, because these people live in it, but What can I envision if I were to live in it? Exactly. And you have to kind of train yourself how to think like that.

speaker-1: Yeah. And that's hard. And you know, we've dealt with that so many times with you know clients as as you've done design work and I've been around to help you. And it's I've I've heard you say it so many times, like look at this this color palette or something, and remember that everything in the room currently as it sits affects the way that you see it. So you have to almost try and block certain pieces out. You know, ⁓ the color of the floor affects the way that the color

speaker-0: Mm-hmm.

speaker-1: that this color swatch may look from a couch standpoint, but remember we're changing that floor. So don't let that floor influence your

speaker-0: Yeah. I'm glad you brought that up because from a designer, an interior design perspective, that is half the battle. Probably more than half, really. And that's why mood boards and visual renderings and all of these applications are used to try to portray the reality because it's difficult for people to see it, you know, in their imagination sometimes, especially when you're not trained to think that way. And it's that same lens that you do have to have when you're coming into a space. And yes, look at the perceived in terms of the potential of something, but it can't dominate the real. It's it's learning how to balance this ebb and flow of the potential and the reality. And, you know, real estate investors, successful real estate investors are good at this too, because a lot of times, you know, they're buying properties that are Some in some cases almost condemnable properties and they can be overrun with just all kinds of filth and and mess. And it can be difficult to see the potential. And being able to clear a space out and, you know, bring it back to life essentially is something that again, you have to sort of compartmentalize in your mind or at least train yourself on how to think and evaluate, which is exactly what we're gonna touch on today for our listeners. Because oftentimes this whole real value versus perceived value is the ultimate motivator in how people are spending the money, whether they're purchasing it at a certain price or they're allocating and distributing their funds a certain way. Yeah. Yeah. So let's dive in ⁓ on where we really see people spend money wrong and how that is equated to real value versus perceived value. Which I kind of mentioned earlier. So back to that concept of real value is what you actually can quantify, which you actually put into the space and the cost associated to that. However, because not everybody values the same thing, the perceived value can actually outweigh the real value. And that's where we typically see people overspend. And I want to dive in a little bit more to the real value in terms of the foundation and the importance of having the foundation in place. Yeah.

speaker-1: Okay, with that, you know, banks lend on real value. Banks finance real value. What is the structure? What what's there? What are the finishes? What are the, you know, the again, the quantifiable pieces that from an investor standpoint, we put into our spreadsheets every day. That's what they look at on the lending. The perceived value is the potential of what it could be. And from the investment standpoint, You know, we do deal with lenders that work on some of that perceived value of like what is the condition currently? What can it be brought to? And I can lend a a gap fund in that to a to a degree. As a buyer, that perceived value takes on a different value of is it worth everything that I want to pay for it? Yes, I see the structural, I the there's the real values. I see a lot of that.

speaker-0: I want to dial in on that right there. Okay. It could be a brand new beautiful home, or let's say five years old, and it has a real value associated to what the finish quality is. But there's still that perceived value. So maybe you come in and you're you don't necessarily like the aesthetic or you don't like the flow of a bathroom, let's say. Well, you can't let that perceived value overrun what the real value actually is. Yeah. And that's what I what I want to articulate to our listeners because there's foundational aspects that that really ⁓ define real value. So you have to think, well, does it have, I don't know, does it have double sinks versus a single sink? Or does it have the ability to have double sinks? Do I have the square footage capable to make it what I want? Does it have, you know, a walk-in shower versus a tub as a the bath bathroom example. And so you're you're evaluating beyond that perceived, which may may fully be rooted in the aesthetic or how it makes you feel. And you're looking beyond that into well, what is the real value? What is the foundation here? What is what am I working with? What is this square footage if I don't move any walls, but I gut this place? Can it actually become what I want it to do? And so that becomes a a big weighing factor of teaching yourself how to take the perceived value against the real value to come up with the value that you're willing to invest into that property. Exactly. Because if you're only relying on perceived value, you know, you could be missing it. And you might be living in la la land and nothing's ever going to be enough for you. And if you're only relying on real value, which a lot of investors do, like you said, let's numbers all the way through. This is exactly how much we can put in. And you're not looking at the well, how is the design and the influence going to influence how somebody experiences and feels and perceives this property? Then you might have a property that isn't moving as quickly as you want it. So it's really learning how to leverage them together.

speaker-1: And a a along that dis that line too, it's also remembering that as you've gone through a design on a house as an investor or something, you've built with a kind of a specific client in mind.

speaker-0: Yeah, you really have to train yourself how to approach it. And in addition to that, as a buyer on the buyer end, you can be so moved by the perceived value that you end up overpaying for properties. And that can often lead to the beginning snowball effect of allocating funds wrong or putting money in the wrong area. ⁓ so you gotta

speaker-1: Yeah, 'cause we gotta remember, you know, as humans, we're we're emotional beings and we use our logic to justify our emotions, especially in purchases.

speaker-0: Yes, that's good. And just to go a layer deeper into the design perspective. So sometimes people will get like in terms of where we see people overspend, they will become so in love with the aesthetic that they begin to over design in a lot of ways and not reap that investment back because they're they're being totally moved by perceived value. And not necessarily real value. And you can kind of get upside down. Like I said, really learning how to leverage them together and kind of balance the two, I think, is essential. And this is exactly why return on design changes everything. Because again, we have the financial return you should be getting from your design, but there is an emotional return and that experiential return. And we want all of those aspects to be fruit. from what we're actually producing. Go ahead. You were gonna say something?

speaker-1: ⁓ I was just gonna say that, you know, you're you're trying to bring the culmination of all three of ⁓ together in into a singular property. Well ⁓

speaker-0: Walk into space, going back to this real value concept, one of the most important factors is what is the function and the flow and the actual livability aspect. Because all of the aesthetics and the little minor tweaks, you can make those. It's more challenging to get those foundational elements and actually more expensive. You know, we've talked about so many times before, you don't want to start executing a renovation before you have a design. And it is exactly because you're getting ahead of yourself. What's that saying? You put the cart. There you go. Same theory of you've got to make sure it has the foundation that all of the infrastructure is already established.

speaker-1: Yeah.

speaker-0: And then everything else flows simply. So when I go into a house, I'm looking at not just square footage alone. I want functional square footage. I want square footage that actually has a purpose that can be defined for that specific space. If it's just square footage for the sake of square footage and it doesn't actually have any definition, it could become dead space. Yeah. And people waste money on just, you know.

speaker-1: Yeah, we've talked about that before. You know, bigger's not always better. In in some cases it is, yes. But when you have bigger just for the sake of having bigger, and now you actually have space that's not usable or it's not functional, what good was spending the money on that space? Right. I think about it like the the very first house that we had when we got married. You know, it it wasn't a huge house. It was a great little house for the two of us. To start with, but I remember specifically like the the master closet was it was small. And it wasn't designed really for a married couple. It was designed more so for one person. And I remember you would you had to travel for work and I was like, ⁓ this has got to be fixed because this is this is just wrong. You know, we're trying to cram everything into this thing in this little space. And I was able to take the same little amount of square footage and more than double. the usable aspect of that in a weekend by by just changing a little bit of the layout and it what and it w it was not an expensive project either. I mean I maybe spent a couple hundred bucks. But when you came home it was like, ⁓ my gosh, this actually works so much better for the two of them.

speaker-0: Yeah. So just for our listeners, Justin has been tinkering with solving problems by evaluating spaces for quite some time.

speaker-1: Even before this is I was trying to invest in property. Yeah.

speaker-0: And I tell people that often, you know, I solve problems through the application of interior design. That's essentially what we do, whether it's real estate investing or not. That's how I view my skill set when I come into the space. And I say that because if you can put that hat on and you realize, okay, I'm I'm evaluating a property. It has great potential. I see the foundation, I see the structure, could support what I want. But there's some things that are maybe misaligned with that perceived value, how I see myself here. So now you have to put on that problem solving hat of what can I do with what I have to make this perceived value align with the real value. And as you begin to view it in that perspective, those valuation points become more even killed. And that's also how you know what the property is worth to you. Exactly. Because in the residential side, the market's gonna speak, right? The property is worth what someone's willing to pay for it. And being able to fill in that gap as an individual, because everyone's gonna have opinions. A lot of opinions, you know, are also gonna be rooted in perceived value and not real value. Yeah. So even for our realtors, if you can begin to really understand the market in this way that you can educate people to make informed decisions. You know, that's a value add. You're going to close more deals because people who have more knowledge and they're better equipped to make decisions are going to refer you and keep the the aspect going, which is exactly what our podcast is rooted in, by the way. Is we're here to share all of this knowledge to equip our listeners to succeed and go through with confidence and understand this marriage that we always talk about between design and investing and how to leverage it as a tool to actually build assets. I'm a little passionate. So let's jump into the next. And I'm gonna just throw this to you, Justin. But how should someone think about their home? How should they view their personal home? And be able to quantify, okay, I have the real value, I have the perceived value, and not let the perceived value

speaker-1: There's a lot of things that are area specific and you know, what real value again, it's what does it actually have? What does it cost? You know, I mean, we we look in areas where there's new builds coming up with the existing homes and it's like, okay, what are what are those new builds costing? What is it that's that's a tangible real value cost. What does that cost to produce that product? Okay, and how does that compare with what I have here? You know. And and so those are real value numbers that you can see. The perception then is how is that is in some aspects that comparison of what's the difference, what's not. What do I see that that one has versus this one doesn't? Those are perceived values. The perception also again goes back to how do I see myself in the space? How can I how do I perceive what could be in an air in that home?

speaker-0: And let's let's segue that into as a investor who's looking at, you know, acquiring a property for the sake of investing, like how can they leverage the two real property versus perceived or I'm sorry, real value versus perceived value as they assess properties to make sure their return on investment is there?

speaker-1: I think as an investor going in and looking at what is real value versus perceived value, that ARV is what what is the condition currently sitting in and what work needs to be done? What are the homes surrounding looking like in comparison? Again, it's it you're looking at it in many of the same aspects. What's around you? What is that value of what's actually happening in the market? And what is what is ⁓ expected at that price point?

speaker-0: Yeah. And I would even say dialing down not to ⁓ overlook, if you will, the demographics, the type of people like remember, you are you should have an ideal buyer in mind. And who are you doing this for? That's gonna also drive that perceived value. Because how, you know, a single man perceives a house versus a married couple with children perceives

speaker-1: That's two completely different perceptions.

speaker-0: Which is something I actually wanted to bring up also. How somebody's value perception is determined is often a reflection of what they value as people. Yes. And so you have to take it with a grain of salt and not to say like if in your own house you can't make it everything you want it to be. But you can't do it beyond the reality of there's a perceived value to this. And I may value it beyond what the buyer values it for. Exactly. But there's still a real value, a tangible real value that's rooted in that structural foundation that is a true value. And perceived value, you've got to hedge from the risk perspective of not everybody's going to perceive this the same way.

speaker-1: Yeah, 'cause what I value in the home is not always the same as what you value in the home. You know? I'm looking at this space, does it meet these requirements? Well, you're looking at that same space from a different viewpoint of how it's being used and what what it needs to have. Yes. So

speaker-0: Exactly. Yes. And as an interior designer, when you're working with clients, especially couples, it's it's a balance of being able to execute that for each person. For both. Yes. And that's because it's it it overflows into that too, where the perceived value for the wife and what her desires and you know what she cares about is not always aligned with what he desires and what he cares about. And so you're almost serving two different goals, but you want them both to be happy with the investment and pleased, but their perceived value is is not, you know, it's it's two different values. However, the real value is the real value. Exactly. The real value is it doesn't matter what you, you know, aesthetically like, there's still a real value and that becomes the baseline. And now you just gotta get that perceived value to come into alignment. And when you feel, or when I shouldn't say feel, we just talked about feelings being fickle. Exactly. When you begin to recognize that these can be equally weighted to a degree, that is more of your execution price, of your threshold, if you will, of knowing, like, okay, this is how much I should be allocating, or this is how I should be looking at this from an investment standpoint.

speaker-1: Also, there's a there's a converse aspect to that too, in that just because you spend more doesn't necessarily mean it's always worth

speaker-0: Exactly. That's exactly what I'm talking about. I mean because it's still rooted in perception. Mm-hmm. But the real value identifiers, the the cost of the foundation for the square footage is the same for 4,000 square feet to 4,000 square feet as an example. Yeah. But if one of this if this 4,000 square foot has three bedrooms and this 4,000 square foot has five bedrooms. Well now we're we're influencing the perceived value in a different way. Yes.

speaker-1: Because who's looking at it from, ⁓ I want the bigger, I just want the massive living room versus I need I want the room that's gonna house my family, my kids, my you know, my my aging parent that's gonna move in with this as well. ⁓ you know, the the value in ⁓ lies in that perception of where we're at, what we're looking for, and the goals that we have. Also, conversely, what I was kinda getting at was as we've talked about too, like, you know, there's a real value between marble countertops versus a a manufactured stone. Which one is going to get more value in a certain home? Yeah. It's going to be dependent market value. You know? If I'm putting marble in the you know one thousand square foot home that has a $75,000 ARV versus I'm putting marble in that half million dollar home, that's two completely different valuations. And one's going to return back, one's not.

speaker-0: Yeah, great point. Cause even though it's still rooted in real value, it's not necessarily gonna hold value. Yeah. Just to wrap this up for our listeners, you know, I think the notion of like being able to train your mind to evaluate in layers of depth, almost like an onion, you know, it's like there's there's layers and every layer reveals something different. But even though every layer reveals something different, you're also looking at it from a different perspective. And you have to teach yourself how to assess in that regard so that you aren't ruled by one value over the other. Because they do, they'd work better together. Yeah. It's not one or the other in all circumstances.

speaker-1: And I think that's, you know, after years of working with you, I think that's, you know, one of the things I've gained to really truly understand, and that's where this whole return on design process comes in, is that it's it's not just rooted in one aspect. You know, you're not just looking at finishes, but you're looking at the form, the functions, the flows, the perceptions. And bringing them all together so that you get the fullness of that return on design. And that's something that I think that you've done so very well throughout all these years. And and I know that I've definitely learned it and I'm still learning a lot of it as we go through and you know, I because it is something that continues to evolve.

speaker-0: Yeah. And no, I did not make him say that. But that's exactly what the return on design blueprint does. It helps people evaluate through more of a diagnosing situation because back to the where do people spend free or misalign their spending the most, it's usually around that ⁓ like shiny, shiny object syndrome where they can be fall into the perception value and they're not evaluating real value at all. And then they end up buying or renovating, you know, whichever category it's gonna fall into. And they're only looking at it from a perceived and there's no strategy around real value, functionality, form, flow. And that ultimately leads people to disappointment. Yeah. And we we talk about lifestyle misalignment too. There there's a very real aspect, you know, if I Us as an example for kids. If I walk into a house with two bedrooms, but it's absolutely gorgeous in my mind, right? Well, there's a lifestyle misalignment. It could be the most beautiful thing, but it's probably not going to suit our lifestyle needs. And therefore, eventually the beautiful aspect will wear off and now I'm going to be dissatisfied. And that happens a lot. That's that's a great, that's a great point. And just to point our listeners back to that blueprint resource, which can help you. I mean, it's a minimal investment and it's packed full of actual framework that helps navigate this whole level of thinking to point you in the right direction. So if today's episode has changed the way you think about valuation around real estate, make sure you are following us and subscribe to our channel. Because every week we're dropping more content around real estate, interior design, and leveraging those together to build real assets.

speaker-1: Yeah, so we appreciate you joining us this time and ⁓ send us questions. We'd love to answer a few for you. And ⁓ we look forward to seeing you next time.

speaker-0: Yep, and follow us on our socials, Real Return on Design. Thanks for joining.