What Impact Do Renovations Have on Appraisal Value?

Home Renovations and Appraisal Value

As an appraiser, I get asked about how much value will be added for different types of home projects or renovations. The truth of the matter is that it is difficult to give a straightforward answer.

Contrary to what you see on the home improvement shows it is not always possible for an appraiser to shoot from the hip and reply back “An updated kitchen will add $50,000 to the value of your house”. There are so many factors that must be taken into consideration.

The best way to look at home renovations is by considering the overall impact they will have on your home. Appraisers are able to do what is referred to as a “subject to appraisal” by looking at the scope of work that owners may want to do.

The scope of work includes the materials of construction as well as the changes that will be made to a house. This can range from updating what is currently there to rearranging rooms or adding square footage.

The appraiser then compares what the house will be like after the renovations to recently sold homes that are similar in age, style, and/or updating. By comparing the value of the home after the renovations the owner can then make an informed decision by comparing the cost to benefit impact of the renovations.

Some of the key factors an appraiser considers when performing this type of appraisal include the functional utility of the home, the amount of heated and cooled square footage, and the materials and quality of construction.

Updates or Renovations?

It’s important to understand the difference between updates and renovations. Updating typically involves less extensive types of improvements and might include painting, and changing out some light fixtures or door hardware.

These types of updates are more cosmetic in nature, however, they can improve the appeal of your home. They can help it to sell more quickly but do not have the value that an extensive renovation would.

A home renovation is more extensive and includes kitchen and bath renovations, total room makeovers, or adding room additions. As you might expect these items are more expensive and take longer to complete and typically add more to the bottom line value of your home.

Sometimes homeowners get maintenance improvements confused with other improvements and the value they add. Examples of maintenance improvements include repairing or updating the HVAC system, replacing roof shingles, or fixing plumbing issues among others. These components of a house are necessary to keep it functioning properly and the cost of the repairs is rarely recouped when you go to sell.

One way that these types of improvements can be taken into consideration is by looking at the effective age of the home. When performing an appraisal the appraiser looks at the actual age of the home, or when it was built.

If nothing has been done to the home but it is in good condition the effective age is usually the same as its actual age. If, however, the home has had many of the items replaced or updated then the effective age of the home will be less than the actual age.

When this is the case the appraiser will then look at compareables that are similar in age that have been properly maintained or at newer homes with a similar effective age. Since newer homes typically sell for more this can help boost the value of the home with the maintenance updates.

Cosmetic updates are less expensive, however, they can increase the street appeal of your home. These types of improvements can help buyers choose your home over another similar one that may not have the same pop that yours does.

Maintenance improvements can have a stronger impact on the marketability of your home because buyers may look at a home that has a new roof or HVAC system and factor this into the equation. They’ll consider the fact that they will not have a large financial expenditure in the near future for these types of repairs.

Home renovations that reconfigure the layout of a house, add more rooms or living areas, or upgrade the kitchen or bathrooms are usually the most expensive. These types of improvements have historically provided the greatest return on the investment from a resale perspective.

There is no rule of thumb as to how much value these improvements will add to your house because it will depend on where the property is located as well as the materials and quality of construction. An appraisal will provide you with the overall impact on value that the improvements will have on your house.

Sometimes homeowners find that the cost of making improvements to their home is higher than the value these items will add. In such cases, they need to consider whether it’s worthwhile to go ahead with the changes.

If you plan to sell your home soon, it may be wise to carefully choose which improvements to make, focusing on those that increase the home’s sale value. However, if you intend to stay in your home for many years, you might prioritize improvements that enhance your family’s comfort and quality of life, even if they are costly. Over time, these types of improvements tend to regain more of their value.

Evaluating the Return on Investment

When deciding which home renovations to make the owner will need to assess whether a renovation will add to the appraisal value. The features of a home that contribute most to value are those that current buyers are interested in and looking for in the homes they are buying.

While an appraiser can provide you with the value of the house after the improvements are made a real estate agent would probably be the best person to speak with about current design and fashion trends. Agents speak with buyers every day and have a pulse on what is currently in style.

A real estate agent can provide helpful information as to what construction materials are popular and what type of floor plans builders are focusing on. Looking at other renovated homes that have sold can also be a valuable source of information.

Appraisers will also consider how the proposed renovations will compare to other currently sold homes. Appraisers look for conformity of the improvements to the surrounding area and how well they fit in.

A home that has an unorthodox floor plan or construction materials may be appealing to you, however, appraisers analyze whether the typical buyer would also find it attractive. If the improvements do not appeal to the the majority of buyers this could negatively affect the marketability and bottom-line appraisal value.

It’s important that the renovations be properly permitted and meet local building codes. If they do not it may be difficult to get the property insured which may also affect whether you can get a mortgage.

Practical Tips for Homeowners Considering Renovations

It is important for homeowners to keep in mind the value range of homes in their neighborhood so that they will not over-improve their homes. Everyone is familiar with the term “overbuilt”, I’m sure. If you do not consider this it would be easy to spend so much on improvements that you would not get a good return on your investment and the sale price would not cover the cost of the renovations.

Including an appraisal in the planning stage of your home renovation provides valuable information that can guide your decisions. Conversely, omitting this crucial step may lead to uninformed choices and guesswork.

By consulting with appraisers and real estate agents before finalizing your plans, you ensure that your decisions are based on accurate information. This approach also helps balance any emotionally driven choices you might make.

Conclusion

I hope my discussion on the impact of renovations on the market value of your home has been helpful. While renovations are done mainly for the person living in the home it is also smart to consider the long-term effects they may have. If you have any questions regarding home renovation appraisals feel free to contact me and as always thanks for reading.

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