Flipper/Rehabber · Deltona, FL · Member since 2018 · 52 posts · 11 votes
Hey Biggerpockets, I just evaluated a 3/2 SFH (1,350 sq ft) with ARV of 230k. The garage was converted into a family room. It was an not permitted but it was done well. Should I count this in the sq. footage when analyzing the deal? The garage would add 350 sq ft to the home and would raise ARV to 270k? Thoughts?
Hey Biggerpockets, I just evaluated a 3/2 SFH (1,350 sq ft) with ARV of 230k. The garage was converted into a family room. It was an not permitted but it was done well. Should I count this in the sq. footage when analyzing the deal? The garage would add 350 sq ft to the home and would raise ARV to 270k? Thoughts?
If your audience is home buyers who use bank financing, you have to go with whatever an appraiser is going to put in the appraisal. If the addition is un-permitted it will say so in the appraisal and the lender will probably not allow the square footage. It will be called "a bonus room, un-permitted" or something like that. Why not just get appropriate permits and have it inspected so you can count the space?
Hey Biggerpockets, I just evaluated a 3/2 SFH (1,350 sq ft) with ARV of 230k. The garage was converted into a family room. It was an not permitted but it was done well. Should I count this in the sq. footage when analyzing the deal? The garage would add 350 sq ft to the home and would raise ARV to 270k? Thoughts?
For starters, only using a sq ft to value ratio formula is dangerous. While that sort of formula can often result in a starting point or point of reference, it is hardly a good indicator of value on its own for a specific property (better when analyzing regional value as a whole). Be careful to establish a price per sq ft that was derived from similar properties, definitely not the price per sq ft from the regional data, and even then it's still just a ballpark indicator, as all property is unique in its own way, and will have elements of value that are not related to the size of the home. Buyers tend to purchase (pay a certain amount) as a function of the whole, not by itemizing components, assigning a value to each, and adding up the multiple results to arrive at an offering price. Funny the appraiser community refuses to point that out the the lenders, which are truly the entity (FNMA, not appraisers) that determine how a mortgage appraisal is calculated - but I digress on that one.
But getting back to you, let me point out the flaw in your analysis. If you have determined the ARV is $270, why are you asking the question in the first place??? Market value is what it is, it doesn't fluctuate depending on your method of investment analysis rather, the credibility of your analysis (and result) fluctuates depending on your method of analysis - make sense?
IMO, the best strategy is to first determine the consequence and go from there. Code enforcement in some areas is very strict, harsh even, and in those cases (like making a homeowner tear it down) buyers are going to react to that with their wallets. Where code enforcement is lax, buyers might not blink an eye. Ultimately it is wise to follow the banks lead (considering most buyers use financing) and banks act according to risk. If the bank thinks buyers are likely to pay less for un-permitted spaces, they will discount the property, and you would be wise to follow suit.
Or, keep it simple, forget about everything I just said, don't bother over-analyzing it, and use the lower value result (lowest possible) in all cases, as savvy and conservative investors might. Next!