Imagine you just finished up a sweet $40,000 kitchen remodel. The old cabinets from the 70s are gone, your green vinyl flooring has been replaced, and a thick granite slab and stainless steel appliances have trumped formica counters and crusty outdated appliances. You’re extremely happy, and also satisfied to have improved your property value by $40,000. That’s what you did, right? Not necessarily.
Why do appraisers not recognize the full cost? It can feel maddening to property owners when appraisers don’t include the full cost of a remodel in an appraisal report. But there is a reason why the total cost might now show up in the final value (assuming the appraiser did a good job of course). The key issue in the mind of an appraiser is how much buyers are willing to pay for the remodel. Or in appraiser lingo, what is the reaction in the market for the kitchen remodel? Through research and comparison to other properties in the neighborhood or market, appraisers find out how much a kitchen remodel is worth. For instance, if homes with an outdated kitchen are selling at $250,000, but homes with a similar kitchen remodel are selling at $270,000, then it’s clear the market is willing to pay $20,000 for the kitchen – despite the cost at $40,000. By the way, there is no universal figure or percentage for what buyers will pay for a kitchen remodel. The $20,000 I used is only an example.
Cost vs. Value: This scenario highlights that there can be a huge difference between cost and value. Cost is what we pay for something and value is what it’s worth. As much as we’d like to think these two are the same, that’s not always the case. It’s easy to see differences between cost and value when we consider things like extra square footage, built-in swimming pools or a very expensive remodel that definitely won’t see the cost recovered in the market because the house is now overbuilt. Experienced inventors know this phenomenon well too because they have to be very cautious about their numbers. They know an $80,000 remodel doesn’t necessarily add $80,000 in value to the acquisition price – especially if the initial purchase really wasn’t that good of a deal. That’s why the goal is to buy low enough to fit in the cost of improvements and profit. Ultimately no investor wants to make the wrong type of improvements or outspend the resale value.
If you’re concerned about resale value, it might be worth it to talk with an experienced Realtor or appraiser about your plans (before you remodel).
Questions: What do you think adds the most value to a home? What type of improvements would you recommend for home owners? Any stories to share if you’ve had your property recently appraised?
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How do you go about challenging a low appraisal? While you might feel frustrated beyond belief, it’s important to not make an emotional argument, but rather share facts and market data in a systematic way to support your case. The following document is a format I developed for my investor clients who kept asking me what they can do to deal with bad appraisals.