Appraisers: Which Upgrades Matter Most?

Question

We're currently working on a live-in flip and for a few reasons, we're planning to refinance sooner than planned. We're in the midst of renovating a basement, then we plan to split a large bathroom into two (creating a master en suite), upgrading the kitchen cabinets/counter, painting the house exterior, adding AC, and upgrading the outdoor area with a new deck and adding a patio.

Since our timing is tight, I'm trying to identify which of these are worth doing before a refinance vs. what should wait until after. We will definitely do the bathrooms and kitchen before refinancing but are there any other items on this list that make a big difference when appraising a property? We're looking at comps to get some idea but curious if any appraisers could offer their professional perspective.

Ko Kashiwagi · Answer

Kitchen, Paint, Floor, Cabinets, bathrooms tends to be best bang for buck in terms of cost vs value added.

I'd search on Zillow and find comps in 2 mile radius, see what the highest sold properties did on their upgrades and materials and model that

Stephanie N. · Answer

Thanks, we've done all of this and are looking at comps in the neighborhood. In my experience, appraisers will add or deduct value of your home vs. those comps based on any differences. I'm trying to understand specifically which items add/deduct more than others. In other words, what are the high ticket items we could focus on to ensure we get the end value we're looking for. We bought a great deal and are clear what needs to be done before selling, but our hunch is that some renovations will add value to an end buyer but not to an appraiser.

Ken M. · Answer

A lot of people misunderstand what adds value to an appraisal. The most important item is location. You aren't going to change that. An appraiser looks for 3 recent sales in the immediate area within the same vintage of build, sq feet, style, number of bedrooms, number of bathrooms and so on or as close to it as he can get. The "subject property" might get some value taken away from it if it has a lot of deferred maintenance. But, the appraiser is looking for comps that have already been updated. There may be a few adjustments for superior materials, but not as much as you may think. Your key is to find 3 or 4 recent sales (Comps) on Redfin for instance, look at the finishes (counter tops, cabinets, etc) and try to duplicate what others successfully sold in the neighborhood. Finished basements can add value in some neighborhoods but they have to meet fire code restrictions regarding doors, windows and ceiling height. Turning a large room into a bedroom and closet can add value depending on circumstances. Adding a bathroom that has been "permitted" usually adds value. The thing to keep in mind, if you expect to cover the costs of doing the upgrades, that typically is "chasing rainbows" unless you bought below value to begin with.Moral of story, if you are planning on living in a property for a long time, renovate to your taste, if you are planning on selling in the next 5 years, be judicious in upgrades. Selling costs money, real estate agents, escrow, title, and concessions and so on. Figure 8% of the selling price. More if you are in an area that has a transfer tax. Calculate your sales cost before you upgrade.Never overbuild for the neighborhood. Here's why: Say you make the bestest mostest wonderful place and put it on the MLS above what everyone else has listed at. You get an offer. Now the seller has to convince his lender that it's a safe bet to lend money on to buy the house. The lender hires an appraiser ALWAYS. The appraiser is ONLY allowed to use previous sales in the appraisal. He can't make up future value predictions. The appraisal comes in at what other properties have recently sold for and that is the amount the lender will lend against. The buyer loves the house but he can't "perform". The buyer can't borrower enough to complete the purchase and it's a big waste of time for the seller, the buyer, the lender. the listing agent, the selling agent, the title company, the escrow company and so on. The appraiser gets paid and gets to keep his license because he told the truth.