Home rehab -- bank telling me to assume $0.30 value increase per $1 spent

9 Replies

I'm looking to finance a renovation of my primary residence and one of my lenders is telling me that if I spend $150,000 on a renovation, I can expect it to add $50,000 or so of value to my home. That seems too conservative to me.

I understand I may not get a dollar for dollar value increase (spending $30,000 on a new garage isn't going to increase our value by $30,000), but $0.30 on the dollar seems quite low to me.

I'm trying to finance the entire project and I'm current sitting at 70% LTV on my current mortgage. I can get funds up to 80% of ARV, so the appraisal is crucial to my ability to get the necessary funds.

Assume home is in a very strong location and assume we would do a high quality renovation and use an excellent architect and builder who's work I know and trust.

Is this $0.30 per dollar spent a common metric?

It depends on what you're trying to do.   If you have a nice, functional kitchen and replace it will a similar but more up-to-date one, the return will be low.  OTOH, if you replace a completely wrecked kitchen with a nice, modern one, your returns can be very high.  That's how fix and flippers make money.   Most home improvements on a residence return a relatively low percentage.

Here's one summary of returns:


And if you spend $20k on fixing basement, you'd be lucky to recover :)

From a banker's perspective the .30 is reasonable for a personal renovation.   People love to change things that add limited value... esp finishing basements.

If you move forward, remember to anticipate overages...  If the financing is crucial double, triple, quadruple check your numbers.  Do not forget to factor in Murphy's Law.

Are you doing this in anticipation of selling?  Don't.  Its not profitable.   If you're doing it because it adds value for you, and you can afford it, proceed.  A house you live in is nothing but an expensive doo-dad, same as a car or boat.  If you can afford expensive doo-dads and want them, why does the return matter.  I have a basic post-war ranch, but has a 8'x14' marble bathroom that's copied from a hotel room at a Four Seasons.  I know its over the top for this house in this area, but its a wonderful amenity for us.  I have no illusions that the money I spent added much to the value of the house.  Some, because I replaced a very dated classical 8x5 bath.   But not nearly what I spent.

Why does ARV come into the picture?

Here in the far Northwest Suburbs of Chicago, I have seen house values estimated higher for renovated homes. However with the current market, they actually sell close to the price of those houses without renovations (the major advantage with renovated houses is that they sell much faster). This is just my personal experience with houses near me.  

@Jon Holdman  

ARV is important because we are planning to finance this renovation with a construction loan, followed by a refinance of our current mortgage and the construction loan at the end. Hoping to keep my cash on the sidelines if possible. I've been working with a couple of different lenders to make sure we have a good idea of the funds that will be available to us.

Developers are building new homes in our neighborhood...tearing down $250k homes and selling new homes for $800k - $1m.  I live in a sought after neighborhood in the city with the #1 rated high school in the state 4 blocks from my home.

Our home is currently worth approximately $400,000 today.  We currently owe $288,000. Lenders are willing to finance up to 80% loan to value based on the after repaired value.  So I had assumed that our house would be worth approximately $550,000 after renovation, which would would give us $151,000 in construction funds to work with.  We could come out of pocket to cover architect, closing costs and the like, but were hoping to not have to put too much more cash into the actual construction.

Our current foundation is ~900sf and our house is currently 3 bed/2ba and 1,750sf.  Very small kitchen with older appliances.  Home built in 1938.

Our plan is to bump out our back wall and create a bigger, open modern kitchen.  We are also looking to expand our half story upstairs and get 3 bedrooms and a small laundry room up there.  Knock out a couple of walls on the first floor to open up the floor plan.  New mud room leading out to the back yard and a new garage.  We only have 14 windows so would like to get all new windows as well.  

A brand new construction home across our alley just sold for $890,000. I feel like for a nicely renovated home on our lot with what I described above $550,000 ARV wouldn't be hard to achieve, but sounds like maybe I'm off base on this one.

We would not be doing this to sell.  We want to stay put and love our street and neighborhood.  But our growing family is quickly outgrowing this space and it's beginning to feel very crowded due to choppy rooms, small rooms and not an open layout.

As others have said here, there's no absolutes when it comes to what a rehab will return.  

If the house is distressed and the rehab takes it from a condition where it's unlivable (or unable to be financed) to a condition where it's livable (or able to be financed), you can easily add more than $1 in value for each dollar spent.  Likewise, if you do an addition and add a nice master suite to a house that doesn't have one but in an area that calls for one, you could easily add more than $1 for each dollar spent.

On the other hand, if you replace neutral finishes during your remodel with custom finishes that don't have broad appeal, you could lose money on your rehab (in other words, house could be worth less after you spend money on it).

Most likely, for a personal remodel, you'll be somewhere in between.  Whether it's $.30 per dollar or $.70 per dollar will depend on the specific repairs/upgrades, the current value of the house, the location, how the house compares to others in the area, etc.

EDIT:  Just realized that was you, Sean...call me if you want to chat! 

Agreed with @J Scott 

From an investor's perspective, the value added should be more than 100% of the money spent on fixer upper rehabs. Some items add more value than others.

For example, an updated kitchen and bath will generally give you most bang for the buck.

So it will really depend on what you are looking to do with the rehab.

Unfortunately when you start changing the envelope of the house your costs are very high.  But the end result will only give you the difference vs. comps.  And appraisers don't use the fully $/sq.ft of sales prices, but rather only a fraction of that.  A third to a half.

For example, say houses in your area sell for about $100/sq.ft.  If you want to add a 200 sq.ft. bump out on the house you may pay $300/sq.ft. to add that small space.  Especially since its kitchen space which requires a LOT of plumbing and electrical.  When an appraiser considers that additional space, they would discount the $100/sq.ft to something like $30-50 and add or subtract that when adjusting comps.  So, you might spend $60K for this and get only a $10K improvement in the value of the house.  OTOH, you may well do better than this.  According to that data I posted earlier, a major kitchen remodel returns 62% of the cost.  However, that number doesn't account for building new foundations or moving exterior walls.  Those are expensive changes.

Second floor footage is only worth about half of what ground floor footage is worth.  Yet, here again you're spending cash on moving walls and roofs, so adding this space is very expensive.

Even with renovations your house will still lag new construction.  Its just the way it is.  A newly built house was planned from the start.  Even with careful planning, major remodels often result in some space that is difficult to use.

If this bank just uses the one third number as their baseline you may have a difficult time moving them off that.  But when you eventually do the refi, the appraisal may come in higher than you expect, so perhaps you could get some of the cash back at that point.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here