When Property Improvements Lose You Money

O.K., you and your family have seen the house you see fit to become old in. The neighborhood is awesome, the neighbors are amazing, and the price was perfect. Now as with most property real estate investors in this situation you begin doing minor upgrades to your house. A little paint in a few rooms, wallpaper there, new flooring in this room, silestone in that room, a light fixture here a fixture there. Finally you are pleased with your now improved house.

Some time goes by and you decide you would like to take a second mortgage for some reason. Let’s assume you realized you could get a much better interest rate.You inform your lender about all the renovations in your house and how amazing it looks, etc. etc. Your lender then tells you about how much equity you have to have in your house and due to your substantial LTV they could let you cash-out some of that home equity. No matter whether you try and cash-out equity, your issue comes when the lender goes to order an home appraisal. The home appraiser comes out and inspects your house and goes back to his office to make his report. After reviewing the data he or she see that there is a problem, your house is great . . . Much TOO great for your location.

Your home has become what appraisers refer to as “Functionally Obsolescent Due to Super Adequacy”. What this basically means is that the changes you have done to your house are much higher than the houses in your area so now you are faced with diminishing returns. No homes in your area have sold anywhere close to what your house SHOULD be sold for and being without appropriate comparable documents to prove your piece of real estate’s value you’re stuck. An appraiser will not be able to give a value to your house any higher than the highest sale price in the area. This may not be so bad for some, but for investors looking to cash out or with low LTVs this could be a real deal killer.

If you would like an unbiased opinion then you probably should consider hiring an property appraiser or real estate broker to give you a firm opinion. Pick a professional that is knowledgeable about your market area because they will know more than anyone how much houses are selling for and what grade these houses are. Stroll your market area and take notice of signs in the yards. If you start to notice a repeated name then that is your good decision for a contact. An property appraiser can go one step further and give you a ”subject to” selling price based on the upgrades you are considering doing to your residence. This can be very helpful if you have bought a property as an investment.

The point here is to be sure you are aware of your market area which is typically defined as your immediate neighborhoods up to one mile from your home. Be aware of what residences are going for and what type of construction quality or amenities they have prior to starting major renovations. If you must be Mr. and Mrs. Jones and do your own renovations, don’t be surprised when your home falls victim to the law of diminishing returns.

Copyrighted R C Smith, an acknowledged real estate whiz in the Houston and San Antonio Texas areas. He operates Austin Appraisals along with Houston Home Realtor

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