An appraiser’s take on the fixer upper craze

Fixer upper appraisal considerations

fixer upperThe fixer upper home is all the rage these days. With the popularity of the HGTV show “Fixer Upper” starring Chip and Joanna Gaines, it seems everyone wants to get in on the action. This show seems to be popular because of the endless possibilities you have to take the worst house in a good neighborhood, that you’ve bought for a deep discount, and turning it into your dream home to live in or even to sell.

Joanna Gaines does have a good eye for design and decorating, which I think adds to the popularity of the show. I think she has covered about every possible use of shiplap that there is.

Since this has become such a popular way of purchasing a home recently I thought I would add my two cents as a real estate appraiser. By taking into consideration the value of the home and renovations buyers can make sure that their dream home doesn’t turn into a nightmare because they’ve bought a money pit that they’ll never get their money out of.

Appraisal guidelines to consider when buying a fixer upper

Today I thought I would give those interested in purchasing a fixer upper some appraisal guidelines to take into consideration, so let’s get started.

1) Consider all of the costs involved- In appraising, cost does not equal value. Just because you spend $50,000 in rehabbing a home does not mean the value of the home increases by the same amount. In addition to the cost of actual repairs and renovations, you have other costs too like demolition, taxes, insurance, loan interest, real estate commissions, etc.

Some costs add to the value of the home while others do not. The cost to increase living area or convert existing space into something that is demanded in the market will give you a better return on your money. Turning a one bath home into two by converting a large unused closet will help to increase the marketability and value of the home.

2) If you are tearing down walls be cognizant of functionality- Altering the floor plan layout of a house should be done cautiously. Appraisers take into consideration the functionality of a home.

If you start tearing down walls to reconfigure the home you want to make sure to keep the floor plan functional. Converting a three bedroom home into a LARGE master suite with a walk-in closet may sound good, especially since all the kids have moved out and you don’t need the extra rooms, but you need to think twice.

I appraised a house similar to this in the past and the value did not come in at exactly what the owners thought it would. The cost of construction far outweighed the value of the home because of the decreased functionality. One bedroom homes do not sell as well as those with three or more.

3) Be aware of the theory of conformity- The theory of conformity basically states that homes are moreappraisal-conformity-and-value valuable when they fit in with other homes in the neighborhood. If you get all funky with the design and the home is not accepted by buyers then it will have a lower value.

You want to keep this in mind when renovating the interior as well. Adding super expensive finishes to a home in a modest neighborhood will not bring as much value as they would if you were in a neighborhood of more expensive homes.

You can get a good idea of what is expected by looking at the interior of other homes for sale in the neighborhood either in person or through online pictures.

4) Price it to the market- Whether you buy a fixer upper to live in or sell you need to make sure you are not investing more into it than you could get out of it. If you are selling it you want to make sure you don’t price it out of the market by paying too much for it up front and investing too much in renovations.

You also want to make sure that if you are going to stay in it to live that you don’t put more into it than you could sell it for if you have to. I’ve heard numerous stories of people who have bought a home to fix up just for themselves but due to life situations, they had to sell. You don’t want to be caught in a situation where you cannot get the money you invested back out of the home if you need to sell.

5) Get an appraisal to know where you stand- A subject to appraisal can help you know what your home will be worth after improvements are made. This will help you work backward and know what you will need to purchase the home for to make the numbers work out or it can help you adjust the cost of renovations so that you’re not upside down in the deal.

Buying a fixer upper can be fun and profitable If you do your homework up front and know what you are getting into you can maximize your enjoyment and profitability.

Question

Do you have any other questions or something else to add about fixer upper homes? Leave me a comment below and let’s keep the conversation going. As always, thanks for reading.

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Comments

  1. I’ve never seen the show “Fixer Upper” but I’ve seen “Flip That House”. When I would watch that show, I would get soooo irritated that they would come in show with an agent at the end saying they were going to list house for $X and then they would subtract the price paid, costs to repair, and suggest that is the profit without accounting for financing costs, closing costs, agent commissions, and actual sales price. One time I saw the show and they checked back in with an “investor” and he was not able to sell the flip so he was living in it. LOL.

  2. Nice job Tom. Love me some Fixer Upper. I completely agree about a functional floorplan. I usually tell people to NOT decrease bedroom count. Well, at times it can make sense to go from a tiny 4-bedroom to a 3-bedroom with larger-sized rooms, but otherwise sometimes people do things like take a 4-bedroom down to a 2-bedroom. Nooooo!!!

    I really like this show and the couple seems authentic. I think that’s why so many people like them. They like to make money, but the image of money isn’t something they seem to worship. On a small note though I notice Chip seems hung up on price per sq ft when valuing properties. Let’s make sure to look at actual similar sales when establishing an after-repair value.

    • Same here Ryan, I like their authenticity. I guess Chip has drank the price per square foot Koolaid like everyone else. 😀 I still think they need to utilize the services of an appraiser and bring them in every once in a while to educate the public on things they need to know and how to maximize value. They’ve overused non-appraisers and have duped the public into thinking that various improvements add very specific and accurate dollar amounts to their house when in reality, not every improvement you make will give back more value than the cost AND it is impossible to be as accurate as they let on.

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