When Residence Renovations Lose You Money

By: R Chandler Smith

So you and your family come across the home you and your family would like to grow old in. The neighborhood is great, the neighbors are awesome, and the sales price was perfect. Now as with the average home owners in this position you begin doing small improvements or upgrades to your home. A little paint in a few rooms, maybe some wallpaper, new hard wood in this room, silestone in that room, a ceiling fan here a fixture there. Finally you are more than pleased with your now redesigned home.

A year or so passes you by and you decide you want to refi for whatever reason. Now assume you came to the conclusion you could receive a much lower interest rate.You inform your lender about all the upgrades in your home and how awesome it looks, yadda yadda yadda. Your lender tells you about the large amount of equity you must have in your home and because of your low loan to value ratio they might be able to let you cash out some amount of that home equity. Regardless of whether you try and cash-out equity, your issue comes when the lender goes to get an home appraisal. The real estate appraiser goes and reviews your home and heads back to his or her office to write up his report. After reviewing the information he or she see that there is a issue, your home is huge . . . Much TOO great for your location.

Your house now becomes what appraisers would call “Functionally Obsolescent Due to Super-Adequacy”. What this really means is that the upgrades you’ve done to your home are much higher than the properties in your neighborhood so now you are faced with diminishing returns. None of the residences in your location have been sold for anywhere close to what your home SHOULD be sold for and lacking appropriate comparable documents proof of your home’s value is not possible.. An appraiser is not going to be able to place a value to your home any higher than the highest sale price in the location. This may not be so bad for some, but for those looking to cash out or with low LTVs this might be a real deal breaker.

If this terribly worries you then you may consider contacting an home appraiser or real estate agent to offer you a firm opinion. Choose a professional that is knowledgeable about your market area because they will know more than anyone how much homes are being sold for and what condition these homes are. Walk your market area and look at the for signs in the yards. If you start to write down a repeated individual then that is your best bet for a contact. An home appraiser can go 1 step further and give you a hypothetical selling value based on the upgrades you are considering doing to your house. This will be very helpful if you have bought a home as an investment.

The point here is to always are aware of your market area which is typically defined as your immediate and surrounding neighborhoods up to one mile from your home. Be aware of what pieces of real estate sale for and the type of construction quality or amenities they have before you start major renovations. If you must be the Jones’ and over do it then conscience of the law of diminishing returns.

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Copyrighted R C Smith, a top real estate authority in the Houston and Austin Texas areas. He runs Austin Home Appraisal along with Houston Home Realtor

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