How much is a remodeled home worth compared to a home without upgrades? An owner might spend $50,000 on improvements, but does that make the home worth $50,000 more? How do appraisers determine the value of upgrades in cases like this? Let’s look at an example.
SUBJECT PROPERTY: Upgraded and sold at $350,000
This property had refinished cabinetry in the kitchen, granite slab counters, an extensively-upgraded bathroom, hardwood flooring, travertine flooring, new fixtures, plantation shutters, and all the bells and whistles (including a blue door). I did not appraise this property, but I’ve called it the “subject” since we are comparing this property to other sales in the neighborhood (one of which I did appraise).
COMP: Few upgrades and sold at $329,500
This property had a very similar square footage and the same bed/bath count, but very few updates overall. When comparing the subject property with this house, it looks like the market paid $20,500 more for the upgrades ($350,000 – $329,500 = $20,500).
MODEL MATCH COMP: Minor updates and sold at $320,000
This property is a model match and sold at $320,000, and really didn’t have many updates other than low-grade granite counters. The sales price was lower since it sold at a slightly cooler time in the market when there was more inventory, but also because there was a den instead of a full third bedroom. The cost to convert this den back to a bedroom was definitely a factor in the lower price. All things considered, this property easily would adjust out to $327,000 to $330,000 when considering the den and the market at the time.
As you can see on the graph, there are many other data points in the neighborhood to help interpret value. When considering comps above as well as all other information, the conclusion is straight-forward:
What are the upgrades worth? About $20,000 to $22,500.
KEY POINTS:
- Cost & Value: There is a difference between cost and value. The owner in this case probably spent more on the upgrades than he/she actually got in value. Other neighborhoods might show a much greater difference, but in this case the owner only got about $20,000 for some fairly expensive updates.
- Should you upgrade? If you plan to upgrade your home, tour some listings in the neighborhood and pay attention to what has been done to those houses and what they end up selling for. Ask yourself if it is worth the cost and effort to spruce up your home compared to the potential resale value.
- Overbuilding: There is a price ceiling in every neighborhood. If you improve your house too much, it probably won’t sell above that price ceiling since buyers are only willing to pay a certain amount in a particular neighborhood before moving on to look at other neighborhoods where values might be higher already.
- Rulers vs. Movers: Sometimes we want appraisers to “give” more value to certain features. The owner in this case would have loved to sell the house for $375,000, but the market was only willing to pay $350,000. This underscores the point that appraisers don’t give value, but instead recognize it in the market. In other words, appraisers don’t create value or even make value go up or down, but simply interpret the most probable price the market is willing to pay. It’s best to think of appraisers as rulers for the housing market instead of a gas pedal or brake pedal
Question: Any thoughts, insight or questions? I’d love to hear your take.
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Hey Ryan:
I know what you mean by some flippers way overestimating the value of their efforts.
Here’s a question: How does the appraiser take into account the results of the contractor’s and pest inspector’s reports in making his or her valuation?
Again, your blog has been an invaluable in my education in real estate.
thanks, ricardo.
Thanks Ricardo for the comment. Sorry for the late response as I was out of town for a few days. That’s a great question. Honestly, in many cases the appraiser does not have the luxury of seeing a pest report or contractor’s estimate of repairs. Obviously with more information the appraiser is able to more accurately consider the value for a property based on the condition. It is usually obvious if there is major wood decay, so in cases like that an appraiser can ask a lender to provide a pest report before completing the appraisal. If there is no lender involved, the appraiser can still ask a client to provide a pest report. Sometimes I do get those reports from clients needing appraisals for estate planning. If a report is not available, the appraiser will have to decide if it is possible to render a credible value without a report or maybe make some disclaimers in the report. If there looks to be a major issue such as an environmental issue, structural issue or something that could potentially really impact value, it is probably best to get those reports first before guessing at how much a certain repair might cost.
While an appraiser does show the market trend in similar house values, who coaches the homeowner to set the selling price?
Is that not the appraiser?
I saw that house worth $370K, but was “pushed” to sell, rather than allowing the time to find a buyer who wanted the exact upgrades and saw the value of what the upgrades cost.
If the house came with a Rembrandt, but buyers only care about Picasso, is the painting worth less? Isn’t that what “Antique Road Show or Storage Wars” is all about?
How about $10K of flaming pink new carpet? Is the house worth more?
Had the house been lost in a catastrophe, I am guessing that insurance would had paid $320K (neighborhood minimum) plus $50K on the upgrades.
What do you think in selling a house for what it’s worth (not deflating the neighborhood to the easy sell price), and then giving back cash to the buyer for their own personal upgrades?
Thanks for the comment Anonymous. You asked some great questions, and I’ll take my stab at some answers.
The real estate agent is the one who usually coaches the seller at what price to list at, though the seller is the one who ultimately decides. The real estate agent might suggest $330K, but the owner might decide on $340K. Often times a house might be marketed slightly above what it is worth, which is a common tactic when selling something. That way there is some room for negotiation for the seller, but the price may be just enough to still whet the appetite of the buyer so offers are being made. Even if an offer comes in slightly lower, the seller may still net what he/she wants to net. However, other times properties are marketed at a price very consistent with their value. Sometimes home owners even obtain “pre-list” appraisals so they can decide how to market their properties. The decision on marketing really needs to consider the value and then what type of market it is – whether it’s a buyers’ or sellers’ market.
You’re right that the $350K house could have sold quickly, though in this case there was at least one price reduction and it was exposed on the market for an adequate time, so the price seemed fairly legit.
The painting would be considered personal property, so it would not contribute to value. While on the subject of these types of shows, I’ll say I really like Pawn Stars.
Insurance companies may very well pay more for a house than what it could actually sell for. Sometimes market value (what the appraiser analyzes) is far less than the cost to build, and other times it is far greater. For instance, when the economy collapsed in 2007/2008, values really suffered, and houses were being sold for extraordinarily less than they could be built for. This is why building virtually stopped in those years because builders could not be profitable in that type of market. But in today’s market there is more room to build because values have increased. Whether the market is hot or not, you’re right that the price paid by insurance companies might be far different than market value.
I’m a big fan of houses selling for what they’re worth. If the seller has to provide a concession or credit though, chances are it’s maybe a sign of the market cooling down. Sellers tend to not offer credits to eat away at their profit unless they have to for some reason. If a house cannot sell at X amount unless there are credits being given, it’s important to ask if the house is really worth that much or not. Ultimately one sale does not make or break value for a neighborhood, so an appraiser should be able to find out why one property sold for far more or way less than other homes in the neighborhood. For instance, a short sale might sell for 10% less than anything else, but an appraiser can ignore that property or make a 10% upward adjustment for that one sale if need be. Each sale should be analyzed and understood. It’s almost like the appraiser has to appraise the comps too because all sales should be understood.
Thanks again for the comment. Keep me posted if you have any follow-up thoughts.
Hi Ryan, my boyfriend and I are looking into buying a home. The house was built in 1954 and needs much updates and outdated replacement items. The house, in my opinion, is way over priced and need to understand what it would take to update and replace needed items…such as a roof, hot water tank and pool pump, along with many other indoor rooms. I was going to contact a contractor to get an estimate for the updates, however, my boyfriend thought getting an appraiser would allow what the cost may be for upgrades along with what the house is currently worth as is. My question is, does an appraiser have the knowledge of upgrade costs?
Hi Tracy. Thanks for reaching out. Appraisers have a general sense of some things, but I would NEVER rely on an appraiser for reliable figures for a remodel. I would 100% rely on a qualified professional, which in my mind would be a licensed contractor. However, an appraiser could be helpful to let you know what the property is currently worth and what it might be worth after the remodel. The struggle here is cost doesn’t always equal value. One thing to consider is you can always get a repair loan to help pad in some of these repairs into the escrow when you buy the home (such as a FHA 203K loan, Fannie Mae Homestyle Renovation Loan, etc…).
I hear you on homes feeling overpriced. It’s hard in today’s market because fixers aren’t priced so low like they used to be. During the foreclosure crisis a decade ago there was a massive oversupply of listings which led to the fixers selling at discounted rates. But in today’s market we’re seeing anemic inventory, which pushes up prices on fixers.
Good luck to you.