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