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

By
Real Estate Agent with Alexander Chandler Realty
https://activerain.com/droplet/8VS

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

cartoon mansion                                                     Cartoon Shack
                                                                                                                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.

 

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Rainer
21,771
Duane M. Brown
Keller Williams Executives Realty - Littleton, CO
303 882 7392

I tell clients all the time to watch out for how much money they spend and decide if it is worth it for what they may get back on their investment.

Apr 27, 2011 03:47 PM #1
Rainmaker
588,565
Susan Neal
RE/MAX Gold, Fair Oaks - Fair Oaks, CA
Fair Oaks CA & Sacramento Area Real Estate Broker

Hi Samantha - It is funny how some people value the "upgrades" they have made to their home.  Some of the things they have done are the first things a buyer would want to undo, and they actually negatively impact the value.  Mostly those are things that suit a particular personal taste. 

I had one person brag about how much he spent to paint his home in custom designer colors.  He thought he had increased the value by more than the cost.  Turns out every room was in bright crayon colors:  bright orange kitchen, bright green dining room, bright purple living rooom, and the bedrooms were navy, bright turquoise, and black. He was insulted when I told him that those colors would make it more difficult to sell.

Apr 27, 2011 03:51 PM #2
Rainmaker
85,498
Samantha Davault
Alexander Chandler Realty - Fort Worth, TX
Fort Worth, TX

Duane, we give them our professional advice and hope they listen. 

 

Yes Susan, not everyone gets the fact that personal taste is different for everyone.  I am hoping that if we educate when we have the chance that it will help someone to make better informed decisions.

Apr 27, 2011 03:55 PM #3
Rainmaker
1,317,757
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

Good advice... I always tell folks to check the anticipated amount of value the improvement will add to the property... then they should consider how long they will be staying in the home... and sometimes, it is ok to "over improve" the property so long as they will enjoy the improvement and don't have an unrealistic expectation regarding the return.

Apr 27, 2011 03:58 PM #4
Rainmaker
85,498
Samantha Davault
Alexander Chandler Realty - Fort Worth, TX
Fort Worth, TX

Joan, if someone truly understands that if they overimprove they won't get the money out of it, but really want to do it for themselves it is one thing, but usually at some point they start tallying up that money and and think they should receive everything back that they put into it.

Apr 27, 2011 04:01 PM #5
Rainmaker
602,216
Mitchell J Hall
Compass - Manhattan, NY
Lic Associate RE Broker - Manhattan & Brooklyn

Samantha,  Great post. I just read your other post which led me here. I agree, If he does come into all that money he should sell his old house and move-up not up grade. He needs to buy a de Lux home or an estate.

Apr 29, 2011 11:24 AM #6
Rainmaker
85,498
Samantha Davault
Alexander Chandler Realty - Fort Worth, TX
Fort Worth, TX

Good one Mitchell.  I think everyone should buy a de Luxe Home or Estate.  Makes perfect sense to me. 

Apr 29, 2011 03:09 PM #7
Rainer
37,832
Andrew McGrath
Donovan Group Realty - Santa Ana, CA

Hello Samantha, This is a great post and a great subject to educate people on. As a licensed appraiser, it is even one of my pet peeves. Technically, the improvements you make to a home (read upgrades) always depreciate from the day they are installed. They do 'add value' to your home but always an amount less than what they cost you to put in. The only thing in real estate that actually appreciates is the land. Investors understand this and will only put in large amounts of upgrades if they got the home for a steal and know that the cost of upgrades will be surpassed by bringing the property in line with the best homes in the neighborhoods. There is no value in being the most expensive home in a neighborhood by 20-30%.

--Andrew

May 05, 2011 04:21 AM #8
Rainer
154,570
James A. Browning
Browning Real Estate School/REO Institute - International, IT
MRE REOCertified(R) SSCertified

Thank you for sharing your blog; we need Real estate Professionals to share their comments and information regarding their markets and experiences. Thanks again from beautiful Colorado; Spring is here in the Rocky Mountains

Apr 13, 2012 07:24 AM #9
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Rainmaker
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Samantha Davault

Fort Worth, TX
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