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How much extra can you price your home if it has upgrades like granite counters and such? It is my understanding, depending on the lender, some appraisers will come out and only look at the outside of the home to get appraisal amount to take back to the lender. And, Some lenders will ask for both inside and outside to be looked at for appraised value.
I have heard that in a good market you will only get back 80% of what you put into the upgrades and in a bad market maybe 50% if your lucky.
If I were a buyer in todays market and I saw 2 homes for sale at the same price in same neighborhood but one had upgrades and the other home had none, is the seller with upgrades dreaming? or is the bottom line always price per SF?
I can tell you that my bank always appraises based not just on square footage but quality of the house. I am gonna be looking at homes in Dallas and I can tell that the house with the upgrades in this market is what I am looking for.
I found this when I did google search, written by and appraiser
As an appraiser the most often asked question to come my way is “What upgrades should I add to my home that would have the greatest influence on the property value?” At first glance it appears to be a simple question, however, the number of factors that are taken into consideration are numerous and not always consistent.
There are several misconceptions that arise in all of these conversations. The first is: if a homeowner spends $10,000 to remodel the kitchen is the home now worth an additional $10,000. Unfortunately the answer is no, as a general rule of thumb, assuming that the craftsmanship and quality are considered adequate, the homeowner will return approximately half of the value put into the upgraded features. However, this can deviate considerably with the increase in value of the home in question. Typically, in higher bracket neighborhoods more upgrades are considered standard and are expected to be in the home. Therefore, the homeowner gets less return on their upgrade investment than compared to a lower valued home’s upgrade investment. This is an economic term known as “The Law of Diminishing returns.”
Another common misconception is, do all upgrades add value to a home, again the answer is no. This theory reflects an appraisal term that is called “Value In Use”, in short it means value to one homeowner is not always value to another. A good example of this is: a homeowner lives in a 3 bedroom 2 bathroom house; the homeowner does not need the third bedroom. So they take down a wall to expand the master bedroom, on the open market few people are looking to purchase a two-bedroom home, in this case the upgrade would be viewed as detrimental to the value.
The indicator of value for any home, is the comparables sales, it is the appraiser’s job to search the neighborhood and determine which recent home sales are the most similar to the subject. For this reason a home in any community can never be worth significantly more then other homes in the community. The best advise that can be offered to any homeowner that is looking to maximize value is to be realistic; do not over improve your property.
A $235,000, we can use this as an example; a homeowner wants to install granite counter tops in the kitchen and baths. A home of this value will only return a reasonable percentage if, low-end inexpensive granite is utilized. A typical buyer in this market may spend $5,000 more to purchase this home with the additional feature; however, they will not spend $20,000 more.
Finally, the biggest determining factor is, the local real estate market, the aforementioned concepts hold true in a steady market. Since the market is not always stable it can have a significant influence on your home's value regardless of condition and quality.
In summary, an appraiser has to abide by government-regulated guidelines as well as business ethics and morals, but the value conclusion is only an opinion and can differ. The best action to take is neutral colors, nothing to extravagant but make your home the way you like it, you cannot concern yourself with appealing to everyone and it is your home.
Written by John Peterson. Appraiser. John owns his own real estate appraisal company,and is an FHA licensed appraiser.
I wouldn't say any specific percentage, it's really based upon comps in your neighborhood and surrounding areas. Talk to 3 realtors and get an idea.
The reason I hate basing anything off of percentages of investments is that you could have paid $20,000 for the same kitchen that I paid $10,000 for because you got ripped off. But it may add $15,000 to the home value. It's an extreme example, but it really depends. Plus, if you paid extra for special upgrades like a warming drawer and seeded glass cabinets and special gliding drawers and such, you may love them and paid dearly for them, but other people won't price it into the value... unless those are expected in your area.
Some lenders require a drive-by appraisal if the buyer is putting 20% or more down. They basically just need the house to appraise for the amount borrowed not the amount paid. These are typically bankers.
A full appraisal is done every time it's a goverment loan such as FHA or VA. Many lenders order full appraisals for conventional loans too.
As a buyer you are paying the same amount for either , so you must insist on a full appraisal and a copy of it too.
As far as ROI in homes, ktichens and baths are the big ones, you get almost 100% of your investment back with these 2. As long as you don't go crazy with the updates. I saw a house 2 days ago, in a not so nice neighborhood, and they installed 3" granite countertop and granite backsplash, and marble floors in the kitchen and bathrooms. Now location is key of course, and where it was this house wasn't worth more than 80K, but they priced it at 125K... which they will never get unless an uneducated buyer pays cash for it.
I don't think that you will like my answer . . . .updates were fairly high on my list when we started house hunting but in the end location, location and location trumped all the updated homes. We passed on a lot of beautiful homes that were in the wrong neighborhood or in the wrong school district, etc and are in the process of buying a home that has no updates to really speak of. 30 yr old tubs, tiled over laminated counter, original kitchen cabinets and cheap carpeting didn't stop us. I have to admit that had all the updates been done the home would have been infinitely more desirable and would probably have shot out of our range
If you are going to update things do it for your own enjoyment. It can be a bitter pill to swallow when all those investments add up to no return and you haven't had the chance to enjoy it yourself
To use one of my father's expressions, putting a ton of expensive upgrades into a crappy house in a so-so neighborhood is "putting whipped cream on a pile of poop."
There was a house in our neighborhood where someone did this. It was a 40 year old 3 bedroom, 1 bath, 1 car garage and they went through and did granite, faux finished walls, marble bathroom, plush carpet, etc. Most houses in our neighborhood sell for $100k, and they listed this one at $120. All of our neighbors laughed about it, and it languished on the market for 6 months before they finally ended up renting it out. We haven't met the people living in it yet...
Personally, I have no desire for a house with granite counters because they are porous and will need refinishing, and I do NOT want a marble bathroom floor after slipping and falling on a wet marble bathroom floor at a resort in Mexico! Give me nice ceramic tile floorings and Corian countertops any day...
Been researching since I posted this and also ask my realtor friend
August 09, 2007
The Truth about Appraisals
The following article is one I have frequently given to clients when appraisal issues have arisen. Hopefully it will help you understand a little more about the process and what goes into an appraisal.
Many consumers are often frustrated when they have a home appraised. Often, they feel that their home is worth more than the appraised value. In many cases they are right! This does not change the fact that real estate appraisers must adhere to very specific rules and guidelines that are dictated by the lender. A few years ago, lenders added a requirement to appraisal guidelines, stating that the intended use of the appraisal must be indicated in each appraisal report. This is simply because appraisals can be used for different purposes, each having different values and rules.
In determining value for the purpose of a finance transaction, appraisers must follow guidelines set by the lenders, which in many cases results in a slightly more conservative estimated value. Everything that an appraiser adjusts for positive or negative must be bracketed and supported by the comparable sales. For example, if a home is purchased for $100,000 and the owners choose to add a pool at a cost of $30,000, the value of the home does not automatically increase to $130,000. The appraiser must determine through a paired sales analysis what the market will support for a pool. If, in the same marketplace, a comparable home without a pool sold for $100,000 and a comparable home with a pool sold for $115,000, then the appraiser can only support a $15,000 adjustment. This is the case with any features that an appraiser can adjust for, not just a swimming pool. There is no set figure for any feature like a view, pool, spa, square footage, bathroom upgrades, etc it must always be bracketed.
On homes two to three years old or newer, upgrades typically can be recovered in an appraised value at actual cost, as the only way for new homes to have these upgrades is to pay actual cost. This is typically reflected in higher selling prices. However, when dealing with older homes, upgrades usually do not recapture their full cost for the same reasons indicated in our previous example dealing with the addition of a pool. Here is an extreme example: If a 40 year old home in average-to-good condition is purchased for $100,000 and the buyers choose to tear down the existing dwelling and build a new house at a cost of $100,000, the value is not automatically $200,000. The reason for this is because the original structure had value. Unless the home is in very poor condition, the sales price reflects value for the subject improvements. Therefore in this case, if the value of the original dwelling was $50,000 with the remaining $50,000 being land value, the new estimated value would be closer to $150,000, meaning that when the existing structure was torn down, that constituted a loss of $50,000 in value. The same applies to a kitchen or bathroom remodel, in that the original kitchen or bathroom had value in its original condition. This is why the cost of upgrades or remodeling of older homes can rarely be fully recaptured. Again, there is no set figure only what the market will support for an upgrade or remodeled home vs. one that is not.
State and lender guidelines require appraisers to base value on closed and verified comparable sales. Although property values are increasing in most areas of the country, typically lenders will not allow time adjustments to be made on comparables that sold within the past 6 months. In regards to pending sales and listings used as comparables in a report, some lenders actually require appraisers to use both a pending sale and a listing. This is not for the purpose of supporting a higher value in the lenders eyes; it is only to show that current market activities still support the closed comparable sales used. When using pending sales or listings as comparables, lenders want to see an adjustment made for possible negotiations. (Yes, even though many homes over the past couple of years have sold above their list prices!) Typical adjustments are usually between 5% and 10% off of the list price. This guideline is a safeguard to prevent appraisers from appraising too high. Furthermore, guidelines also indicate that appraisers can only base their opinion of value on sales that have closed escrow, and the pending sales and listings can only be used to support the closed sales.
If the appraisal were completed for a reason other than a mortgage finance transaction such as to determine a reasonable list price, you would likely see a higher estimated value. As in this case, listing and pending sales would be the primary support for the value estimate. When property values in a given marketplace are in the process of a drastic increase, this allows an appraiser to value property in real time based upon current pending sales or listings rather than sales that, although they may have closed within the past three months, have actually gone into escrow four to six months prior.
It is also for this reason that, when appraising a home that has just sold within the past three or four months, a lender will not accept an appraisal at a significantly higher value than the previous purchase price based upon the passage of time alone, unless documentation can be provided that indicates the property sold below market value at the time it was originally purchased. The only way to show an increase in value is to provide documentation that supports upgrades or remodeling completed by the current owners since the last sale transaction took place. For example, if a buyer purchases a home in November of 2002 for $600,000 and the new owners have added $55,000 in upgrades, given the fact that it is a new home, the appraiser will likely be able to get full value for the $55,000 in upgrades. If the appraisal is documented properly, the appraisal on the home is likely to be $655,000.
Although there is nothing in writing, appraisers are typically given 5% margin of error by lenders. Any more than that and the value will most definitely be cut by one of the lenders appraisal review staff personnel. Therefore, an appraiser can fudge a couple of percent. While the reviewer will know when an appraiser is pushing its value, if it is within that 5% range, they will most often let it slide. If an appraiser pushes beyond the 5%, lets say to 6%, 7% or 8% above and beyond what it is truly worth based upon comparable sales, the reviewer in charge of the file will take it all away and cut the value by the full 7%. Keep in mind that every single lender in today's mortgage marketplace has a review department. Therefore, given the example just mentioned, it would not be in the appraisers or the clients best interest to push the value too much. It could end up exposing the property evaluation to a severe appraisal review!
How much extra can you price your home if it has upgrades like granite counters and such? It is my understanding, depending on the lender, some appraisers will come out and only look at the outside of the home to get appraisal amount to take back to the lender. And, Some lenders will ask for both inside and outside to be looked at for appraised value.
I have heard that in a good market you will only get back 80% of what you put into the upgrades and in a bad market maybe 50% if your lucky.
If I were a buyer in todays market and I saw 2 homes for sale at the same price in same neighborhood but one had upgrades and the other home had none, is the seller with upgrades dreaming? or is the bottom line always price per SF?
Any ideas from you realtors?
I used to do appraisals in northern CA. Yes upgrades bring up the value of your home - especially in the kitchen and bathrooms however, the upgrades need to be done with the rest of the neighborhood in mind. In otherwords, you can over-invest in your home for the surroundings.
With the market the way it is here right now, I wouldn't add too much to your asking price because of the upgrades, or you'll have trouble selling your home.
I used to do appraisals in northern CA. Yes upgrades bring up the value of your home - especially in the kitchen and bathrooms however, the upgrades need to be done with the rest of the neighborhood in mind. In otherwords, you can over-invest in your home for the surroundings.
With the market the way it is here right now, I wouldn't add too much to your asking price because of the upgrades, or you'll have trouble selling your home.
That's what my realtor said too. We live in a upscale neighborhood and upgrades are expected to be in the home. if a neighbor puts in granite and I have corian, they won't sell it for more is what she told me. It might sell faster then mine maybe, but for not a lot more. Case in point, the house across the street is loaded with upgrades, but the inspector did a drive by, so he had no idea of the upgrades and the sell price showed that.
Debbie....
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