Foundations, walls, columns, floor and roof joists, trusses, and beams are elements that form the structural system of a building. Structural systems carry the building’s weight, as well as the weight of its contents and occupants. They also enable the building to withstand the forces generated by wind and earthquakes. Plywood-sheathed “shear walls,” diagonal bracing, and steel “moment-resisting frames” are the common systems used to make a house earthquake resistant. As the structural systems are usually hidden behind architectural finishes, their quality is not always considered in determining the fair value of residential properties.
In this article, I will concentrate on the earthquake-resisting structural systems of buildings (houses) in the San Francisco Bay Area and quantify the price premium a house with superior earthquake resistance should command.
A house with a well-designed earthquake-resisting structural system would suffer minimal or no damage when subjected to lower levels of ground shaking and incur repairable damage when subjected to strong ground shaking from large earthquakes. A building with poorly designed structure, on the other hand, may have significant damage at lower levels of ground shaking and may be destroyed when shaken by strong ground motion.
Consider a hypothetical case of two houses (House A and House B) in the San Francisco Bay Area that are identical in appearance, except that House A has a better-designed earthquake-resisting structural system then House B. The probability that these houses will be affected by a large earthquake in any given year is about 3.3%. Let us assume that these houses are selling for $1,000,000 and that for House A the cost of repairs after a large earthquake will equal to 10% of its replacement value, while the repairs will cost 40% of replacement value for House B.
If we assume that the value of improvements is 50% of the total value of the property , the annualized expected repair cost (or expected loss) for House A is $1,650, while it is $6,600 for House B, for a difference of $4,950. For a 5% capitalization rate, the value of $4,950 per year reduction in expected losses would be $99,000.
The implication of these numbers is that House A with the better structure should be valued at about $100,000 more than House B. If the fair value for House A is $1,000,000, then the fair value of House B should be $900,000.
In conclusion, a well-designed structural system can add substantial value to a house, while a poorly designed structural system would reduce its value. Unfortunately, this significant factor is not always considered in determining the fair market value of houses. Home-buyers are advised to consult a structural engineer with expertise in earthquake resistance of structures prior to making an offer to buy a house in the San Francisco Bay Area.
BoomereseBlog 
Onder: Knowing the benefits of a sound structural system in a residential structure and the ‘piece of mind’ provided for folks in the SF Bay Area, I must ask, would the potential increase in market value be realized through the seismic retro-fitting of an older, less superior earthquake resisting structure? Is the return on one’s investment in any type of upgrades going to come back at the time of a sell based on similar homes in the neighborhood without such improvements? Is this an improvement that should be considered first, prior to providing any upgrades for energy efficiency of a home? Reducing energy costs and having a more comfortable living environment seems to be overriding the concerns for safety and property loss should ‘the next big one’ come sooner than later. Today’s ‘green washing’ seems to encourage this aspect of home retrofitting more so than the benefits of a structural upgrade. Any thoughts on this line of thinking? What is the current pulse of the real estate professionals in this regard? What might be considered the better ‘pay back’? Obviously, both relate to some amount of monies out, but which might be considered the most beneficial investment to the homeowner??
Bill,
Fair market value is what an informed person is willing to pay for something. If a buyer and his real estate agent cannot tell the difference between House A and House B, they would price them the same. The buyer of House B would be paying too much for it, while the buyer of House A would be getting his money’s worth. As far as return on investment, a $5,000 investment into bolting your house to its foundations and plywood sheathing the crawl space “cripple walls” would make the difference between repairable damage and a total loss in a large earthquake. If you are “flipping” the house and think seismic retrofit will not return your investment, you should pray a lot that the earthquake does not happen before you can sell it.
In a prior article I noted that the fair price of a property depends on numerous factors and named a few of them. So far, I wrote about the value of energy efficiency and earthquake resistance, and I quantified their effects on the fair market value of a house. Once you quantify the values of various improvements and how much they would cost, you can make rational choices based on a comparison of returns on your investment. Of course, if you do not believe that we can get hit with the “big one” any moment and you would rather spend your money on granite kitchen counters, that is a personal choice. As an engineer and real estate agent, I believe it is my duty to “educate” my clients so that they can make informed decisions.
I knew that there must be a benefit to having a real estate agent who is also a structural engineer:)
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