Can my house be appraised in the middle of a renovation project?

Can my house be appraised in the middle of a renovation project?

appraising during a renovation projectDuring one of my recent assignments I was speaking with the homeowner to set up the appointment. Whenever I do this I like to ask questions about their house including whether it has had any recent updates or renovations. It turned out that they were in the process of completing a renovation on a bathroom. They didn’t understand how I could do an appraisal with the home in this type of condition. Since other home owners may also be in the same situation, and may be asking the same question, I thought I would take time today and explain how a house can be appraised in the middle of a renovation project.

“As Is” or Subject To”

An appraisal can be made either “as is” or “subject to” depending on the requirements of the bank or mortgage company that the appraisal is being prepared for.

“As Is”

An “as is” appraisal is just what it says. It provides a value estimate of the property considering the property just as it was seen on the date of inspection. With this type of appraisal it is very important for the appraiser to note all condition items that will have an effect on it’s value. If a bath is being renovated and not usable then this will obviously lower it’s value because it has one less bath.

It is helpful for the appraiser to know the cost to put the bathroom back in usable condition because the bank usually asks for this “cost to cure” and it also helps the appraiser analyze the cost vs. contributory value of the bath. Since most of the infrastructure of the bath is already in place the cost to finish out the bath is obviously less than the the value the additional bath will add to the overall value of the home.

Because the appraisal is being made in “as-is” condition the appraiser may use comps that reflect the current number of baths in the home as well as those that have the number of bathrooms the home will have after the renovation is complete. This is part of what appraisers call “bracketing” and is used to provide a more accurate opinion of value. In this situation, as I stated above, a home with one less bath would probably understate the value of the home being appraised because it does not have the plumbing infrastructure I mentioned, however this could be accounted for in the final value reconciliation.

“Subject To”

As you might expect, the “subject to” appraisal values the home considering the bath renovation as if it were already complete. It is important for the appraiser to know exactly what the bath will look like when finished so a set of drawings or plans,a list of specifications, and the cost of construction is needed. While the cost of the renovations is not a reliable indicator of the value the bath will add it should give the appraiser an idea of the quality of construction and materials being used.

This type of appraisal can provide some very good information about whether the bath renovation is a good investment because it will compare the renovation cost to the added value. So if it will cost $10,000 for the renovation but the value added is only $5,000 then that would not be a good return on investment. Most people in this situation will weigh the personal enjoyment they will receive against the cost and usually decide to go forward. What they should keep in mind is that if they decide to sell in the near future, they will not get that money back by asking more for their house than the market will support. In some instances, in an appreciating market, home prices may be rising enough to recapture that cost but this is not always true.

As you can see, it is not difficult to value a home that is in the middle of a renovation, however the appraiser will need to have additional information about what the improvements will be like when completed, and the appraisal value will only be valid when that renovation is finished.

Question

Have you ever had a “subject to” appraisal and if so did the outcome surprise you? I’d like to hear your story so leave a comment below, and as always thanks for reading.

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Comments

  1. I built a covered porch on the front of my house, roof is done but the soffit and decking are not. It has gotten cold and I won’t have it finished until spring. I was hoping to get an appraisal to drop my PMI, I just hit my 20%, paid $140k and similar houses are selling for $170k now. Should I take the chance and go through with the appraisal or suffer the PMI for 6 months until I get it finished? Thanks

    • The appraiser would most likely appraise your home “as is” with the porch in its current condition. If he does then he will probably make an adjustment for the unfinished soffit and decking. This may not matter that much and if so it would not hurt your value too much. It all depends on how much your home has to appraise for in order to drop PMI. If you have a lot of cushion then go for it, however, if you’re close then you may want to wait.

  2. We are scheduled for a refi conventional loan appraisal. Our house was built in the 70s so we have been slowly updating, painting and remodeling. Our downstairs hallway has new walls, all painted and we put down a rug over the linoleum, but we have not put on the new trim and due to the hallway remodel we have no door on one of the bedrooms..how will this effect our home’s value? I assume it’s considered cosmetic and won’t effect the loan, just the appraised value.

    • Yes, there are considered more cosmetic, however, they appraiser will probably do the appraisal with the home in “as is” condition. They will probably make a small condition adjustment but I would not think it would affect the value that much.

  3. We need to refinance so we can afford to renovate. Not sure it the current market value, up 25% from the original sale, considers the condition. How difficult will it be to have an appraisal near the market current value if the condition is subject to change? All intended fixes have great added value… It would be good to get a refinance near the original purchase price but, that would only cover a new HVAC system.

    • From my experience in appraising during these situations it seems banks handle this either of two ways. The first is to have an appraisal done with the house in its current condition. It is possible that the amount of money you want to borrow to do the renovations is available with your current equity. Another situation is to do a “subject to” appraisal which will give the value of the home after the proposed improvements are complete. I think it all depends on the amount of equity you have in your home and the programs and policies the lender has. Hope this helps.

      • We bought it with an FHA in 2014 for $123k @ 3.75% plus .85% PMI (for the loan life! Yikes) including closing costs and, according to real estate sites such as Zillow, Redfin and Trulia, is currently valued between $132k and $162k. Looks like it would be easy to come in with more than 20% equity, get some cash and, drop PMI, which is about $135/mo. I assume the $162k estimate would be for optimal condition.

  4. With appraisals for refinance, it is important for the homeowner to be open with the lender about any unfinished renovations prior to the appraisal. This is because some loans cannot fund unless the construction is finished and some homeowners hope to use the money from the refinance to finish the project. Not telling the lender in advance can result in headaches for all parties involved.

  5. On a different note, I think I’d hit my head on the ceiling when getting out of that tub. Is that a converted attic?

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