Throwing Money at a Property Doesn't Mean You Will Add Value

Recently I had a discussion with a relative who told me about another relative who may come into a very large sum of money.  The means by which this relative may acquire this large sum is worthy of another post all by itself, but for now we will try to stay on topic.

This soon to be wealthy relative has some mighty big plans, as we probably all would if facing a similar windfall.  His biggest plan is to remodel the house.  While this may sound like a good plan and a good investment, the first thing I would recommend to anyone who is about to plan a remodel is to find out what the home is currently worth and to find out how much real value any remodeling would actually add to the property.  

When speaking of real value, I mean value you could actually realize when selling the home.  There is of course a certain kind of value involved in just plain enjoyment of your home, but you should be very realistic when it comes to how much you spend on remodeling or renovating a home.  Just because you spend one hundred thousand dollars on the remodel, doesn’t mean you will get that money back upon the sale of the home.  You have to be knowledgeable about how much value the neighborhood will bear.  If you upgrade your seventy-five thousand dollar home into a two-hundred  thousand dollar home, but the neighborhood has no other homes valued at two-hundred thousand dollars, but only homes worth less than one hundred thousand dollars, do you think you will be able to recoup that other one hundred thousand dollars?  The answer here is usually a resounding NO!

      How you see your house after remodel

                                                    
                                                                                                                How the appraiser sees your house

Unless you find a cash buyer that is so in love with the home or so clueless, that they don’t have an appraisal done, then you are most likely never going to see that additional hundred thousand dollars again.  The reason is because anyone who is receiving a mortgage loan in order to purchase the home will be required to obtain an appraisal prior to closing and that appraisal value has to be at least as high as the loan amount and depending on the type of financing usually must be higher than the loan amount, because most loans are now requiring a down payment.   The term that mortgage companies will use to reflect the appraised value versus the loan amount is called Loan to Value.  An example of Loan to Value is  a home worth one hundred thousand that is being financed with a loan of ninety-five thousand dollars is a ninety-five percent LTV, or Loan to Value.  In this ninety-five percent Loan to Value scenario, the buyer is bringing in a five percent down payment and financing the additional ninety-five percent.

Now that we understand Loan to Value, there is another thing we need to understand.  That is market value.  The market value is the value that the market will bear, or put simply how much the similar homes in the neighborhood are selling for.  In order to complete the appraisal, the appraiser will be looking for homes in the neighborhood that have sold within the past six months that are comparable in features, size and construction to the home you are selling.  If the appraiser can’t find anything similar to your home in the neighborhood, then there could be a problem with the appraised value and the financing approval.  If the appraiser can find homes that are similar, but the value is much lower than what your asking price is then there can also be a value problem. Your value will be based on the values in the neighborhood and that is the value that the lender will use to determine what they will loan to the buyer to purchase the home.

So basically the lesson here is that just because you spend a certain amount to remodel or renovate, doesn’t mean you are adding that amount to the actual value.  Gather knowledge from a professional in your area before spending the money to remodel and be smart about what you spend the money on.  A pool for example may be of value to you while you are enjoying it, but you will not necessarily receive back your total investment when it is time to sell.  Big value items are usually kitchen and bath remodels, but be careful to not overspend and try not to purchase the most expensive materials.  Develop a budget that will get you the most return for your investment and seek advice from professionals prior to diving into your remodel.  

A good source for information on neighborhood market values is a professional Realtor® in your area.  A Realtor® can give you information on what features area buyers are seeking and what homes are selling for in your market.  Make a connection with a Realtor® in your area and then when it comes time to sell you will be prepared in advance and have a Realtor® ready to market your home.

As for my relative, I hope his ship does come in and with it I hope he also receives a boatload of wisdom on how to properly invest and manage his new loot.

If you are interested in buying or selling property in Fort Worth or the surrounding areas call me, Samantha Davault of de Luxe Homes & Estates,  at (817) 966-7963.  I would be happy to assist you with all of your Fort Worth area real        estate needs.