How to add $15k of value?

35 Replies

Bought our first home 2 months ago, we got a good price and decided to do just 10% and keep the additional $ for emergencies and upgrades then have the home reappraised a year later to remove PMI (extra $100 a month)

Home is currently appraised at $415k.  Our mortgage will be about $365k next year.  The town we live in has a median home price of $485k and has averaged an appreciation rate of about 3% the last 3 years (I'm not banking on this and just hope for 2% next year).

Our initial appraisal mentions the carpet on the steps and in the bedrooms being in bad shape, and the downstairs and upstairs guest bathrooms not being updated (house is only 11 years old).   

So my thought is to replace the carpet in the bedrooms, have the steps done in hardwood to match downstairs, and sinking about $1500 into each bathroom for new floors and vanities (currently vinyl and cheap contractor stuff).  I'm DIY so I figure this is about $7k of work.  Do you think that's enough to get the value up another $15k, which is what we'll need figuring a 2% appreciation to get to 20%.  

Any other simple DIY suggestions, little tips or tricks?  For example the lawn was pretty ugly when original appraisal was done, I know that's not a factor, but we're taking steps now to be sure its green and full for that first impression.  

Make sure nothing is broken or worn when the appraiser comes through. I would skip the carpeting for either a good quality laminate or hardwood, which is worth more and lasts longer. Can't really say about the updated bathrooms - if the house is only 11 years old, unless it is really obvious low-quality builder materials. Maybe put hardwood on the steps with a good quality runner, it makes a very nice impression and protects the hardwood. 

Yea the bathrooms are roll out vinyl and just low quality, which is surprising because it was built by a fantastic local builder.  We keep going back and forth on hardwood upstairs as well, but we both kinda like the idea of carpet in the bedrooms.  We don't plan on selling any time soon, so I don't want it to be JUST about adding value, I want to be sure we're doing it for us as well.  

Put hardwood down over carpet that adds value. Put tile in the bathrooms. And the vanities will help as well.

This is probably specific to your market.  In my opinion, items like that need to be done either way.  New floor covering may not always add so much as NOT doing it may be taking it away.  The question is, did the last appraiser ding you in Value on the appraisal?

Also, I wouldn't assume that appreciate and count on it for the appraisal.  Even when houses are generally going up 2% a year, that is just a statistic.  The appraiser will use the comps from the last 12 months, so it is really just a snapshot of the last 12 months.  They may be higher or lower than that.  I'm not saying the number isn't true, just that I wouldn't use last appraisal + 2% as math that might translate to the next appraisal.  

$1500 per bath sounds like a good upgrade.  $7000 for carpet on steps and bedrooms sounds high.  Maybe I read that wrong.  

I know we are investors here, but this is your home.  Spend the right amount of money to make your family comfortable and happy in it.  Hopefully, that will help your situation, but making your family happy is better goal.  I hope its a win-win for you. 

Bathrooms and kitchens are where the value is. If you stain the cabinets, switch them out, retile the kitchen, add a backsplash, knock a wall down and put in an island to open things up. Definitely agree with the bathrooms though.

Just to clarify; the 80% threshold to remove PMI for Fannie is 80% of the Original value (purchase price), not current value. When using a current appraisal, the LTV can not exceed 75%. So, at a $365k loan balance you'd need to appraise at $485k.

You hit the nail on the head. I'm looking for the win-win. I was saying $7,000 total to have the carpets, steps and two bathrooms all redone. I think this went slightly negative toward the appraisal so I hope having them updated will take me slightly positive. I'll need the appraisal to land right around $440k (which is actually the tax appraisal value) if I want to drop PMI without adding additional capital to my principle.

The house across the street from us is currently up for sale, its a little dated.  Slightly smaller plot and about 400sq/ft smaller than ours.  They're currently listed at $450k.  The only thing they have over us is a partly finished basement with drop ceilings.  I'm gonna keep an eye on their listing.  They're going to be my best comp by far.  If they sell over $440k I'll probably pull the trigger on the appraisal next year and hope that I come in around $435k if I do I'll just put down the extra $5,000 at that time and get it behind me.  

Originally posted by @Wayne Brooks :

Just to clarify; the 80% threshold to remove PMI for Fannie is 80% of the Original value (purchase price), not current value. When using a current appraisal, the LTV can not exceed 75%. So, at a $365k loan balance you'd need to appraise at $485k.

I have a Mortgage through Wells Fargo. I was told when I do the appraisal the equity just needs to go high enough to give me a 80% LTV. Looking at it again though my numbers were off. I'd actually need it to get up to $455k to give me a LTV of 80%. So maybe next year isn't realistic. That's okay, when we looked over all the numbers we knew if we could get rid of PMI within 4 years it would be the right way to go vs 80/10/10 or lender buyout. So I have time, just the sooner the better.

I keep paying extra, get the loan down to $355k in 2 years, maybe do the basement or add a deck by then.  $445k shouldn't be too hard to hit.  

@Eric P.   For Fannie--At 2-5 years--75%.  After 5 years--80%.

Originally posted by @Wayne Brooks :

@Eric P.  For Fannie--At 2-5 years--75%.  After 5 years--80%.

I believe it, I don't think that's the situation I'm in however.

Well, do you have a Fannie loan, or not?

Nope, wells fargo

@Eric P. Wells Fargo originated your loan, and likely services it.  But, odds are 90% or better they're not keeping it, and it's a Freddie or Fannie loan, you just didn't realize it.

Originally posted by @Wayne Brooks :

@Eric P. Wells Fargo originated your loan, and likely services it.  But, odds are 90% or better they're not keeping it, and it's a Freddie or Fannie loan, you just didn't realize it.

That was one of the specific questions I asked the broker and he said that wells fargo wil not transfer out my loan. I had him and my lawyer get involved to be sure this was a real option. As I mentioned I could have gone 80/10/10, but if I could get rid of the PMI inside of 4-5 years the PMI route would be the better option. If it isn't gone in 3 years I'll just put a large payment down on my principle. But I'm just seeing if I can get it done in 1-2 years.

Okay, best of luck.

What about the kitchen?

Depending on the condition it's in, I would refinish the cabinets.

If they are made from MDF and can't be sanded then you might have to get new ones.

Since you are a DIY guy, the least expensive way is to go with project source cabinets and stain them yourself. They are the least expensive plain wood cabinets. You get to choose the color you want and staining wood is not a difficult DIY project.

Originally posted by @Luka Milicevic :

What about the kitchen?

Depending on the condition it's in, I would refinish the cabinets.

If they are made from MDF and can't be sanded then you might have to get new ones.

Since you are a DIY guy, the least expensive way is to go with project source cabinets and stain them yourself. They are the least expensive plain wood cabinets. You get to choose the color you want and staining wood is not a difficult DIY project.

We were lucky with the kitchen.  The previous owners had a very gaudy taste that was very matchy matchy.  The walls were all like mustard yellow, the drapes all huge over the top like red silk.  Just red and yellow and gold everywhere.  I actually kinda hope that hurt the appraisal a little as well.  We're doing much more neutral greys, tans, blues.  

They had just updated to Brazilian hardwood floors, new stone tiles in the kitchens, counter tops and cherry cabinets.  Once all the walls have been painted and window treatments replaced we are thinking about painting over the kitchen cabinets as they are just too red.  Maybe they wont look so bad when the yellow is gone, but we're thinking about doing a smokey grey.  We keep seeing it all over HGTV and it would look really nice we think.  We'll also put up a nice back splash.

Originally posted by @Eric P. :
If it isn't gone in 3 years I'll just put a large payment down on my principle.  But I'm just seeing if I can get it done in 1-2 years.  

Great thread! If you got the loan 2 months ago, you probably have an awesome interest rate. Probably less than 4%...that is some seriously cheap money! I would take a closer look at the opportunity cost of paying down the principal to avoid PMI. If your house is increasing in value 2% each year ($8,000), it might be better to let appreciation do the work rather than making early payments on your mortgage.

I don't know what your exact numbers are, but let's say you reach a point where an $8,000 pre-payment will allow you to ditch PMI a year early. You have 2 options:

Option 1: Make $8,000 prepayment to reach 80% LTV and cancel PMI. You will save $1,200 in the first year on cancelled PMI. It will also save you 4% per year in interest payments on your mortgage (approx $320/year). But you will have $8,000 less to invest in other real estate investments for the foreseeable future.  If you have the opportunity to compound that $8,000 at a high rate of return, your prepayment carries a large opportunity cost.

Option 2: Wait 1 year to let appreciation increase your equity by $8,000. This costs you $1,200 in PMI ($100/month). But you can use that $8,000 to invest in other opportunities for many years to come. If you can achieve annual returns of at least 6%, this is probably the better option.

Bottom line:  A prepayment on your mortgage can be viewed as declining a low-interest loan.  It makes sense for some people, but for most real estate investors it reduces future net worth and is probably not the best decision.  

@Eric P. If you do end up putting tile down on the floor it is imperative your floor is dead level and free of debris. After removing the existing floor make sure you vacuum twice to remove debris.  If you put anything larger than a 4"x4" tile they will crack within a couple of years. If the floor is not 100% level, you can use mosaic tiles. I can't guarantee they won't crack but you'll be buying yourself another 5-10 years with the mosaic tiles.

From an investor standpoint, I'd recommend putting hardwood in the bedrooms. Carpets get old, dirty, and always end up getting thrown out. If you get sick of the hardwood color, you can always re stain it. 

Hope this helps, 


Patrick 

@Eric P. , may not be an option post closing, but some banks will let you pay the PMI in full upfront, which reduce can reduce it by 40-50% (or so I have heard, since I don't pay PMI).

imo appraisers don't look that specifically at these individual items you are discussing, so you are kind of rolling the dice on what it may appraise at. An appraiser is more looking at general condition, square footage, baths, beds and comps. So statistically speaking $15k is pretty minor on almost a half a million house

Originally posted by @Eric P. :
Originally posted by @Wayne Brooks:

@Eric P. Wells Fargo originated your loan, and likely services it.  But, odds are 90% or better they're not keeping it, and it's a Freddie or Fannie loan, you just didn't realize it.

That was one of the specific questions I asked the broker and he said that wells fargo wil not transfer out my loan. I had him and my lawyer get involved to be sure this was a real option. As I mentioned I could have gone 80/10/10, but if I could get rid of the PMI inside of 4-5 years the PMI route would be the better option. If it isn't gone in 3 years I'll just put a large payment down on my principle. But I'm just seeing if I can get it done in 1-2 years.

Looks like @Wayne Brooks gave up, but I'll give it one more shot...

You almost certainly have a conventional (Fannie Mae conforming) loan.  It doesn't matter who originated it or whether it's transferred or not, the loan is most likely a Fannie Mae.  And it's unlikely that Wells would vary from FNMA guidelines, as then they could never sell the loan (this might be typical for smaller banks, but not so often the larger ones).

Fannie Mae has some very specific guidelines about removing PMI, laid out here:

https://www.fanniemae.com/content/guide/servicing/...

Check out the section titled:  

Borrower-Initiated Termination of Conventional Mortgage Insurance Based on Current Property Value

It very clearly states that you'll need to be at 75% between 2-5 years...

Now, I guess it's possible that Wells is happy to not conform to FNMA guidelines for this, but I'd think that was pretty unlikely.  Do you have something in writing?

Yes we do have it in writing.  

Originally posted by @Eric P. :

Yes we do have it in writing.  

Directly from an underwriter?

Sadly, too many loan officers don't know the first thing about underwriting guidelines...I can think of probably close to 50 times a loan officer has said, "Oh yeah, that won't be a problem"...just before it became a problem...

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