When Property Improvements Lose You Money

When Property Improvements Lose You Money

Author: R Chandler Smith

Let´s say you´ve have found the home you and your family see fit to become old in. The lot is good, the people are awesome, and the asking price was perfect. Now as with many property owners in this situation you embark on doing minor alterations or upgrades to your home. A little paint in a few rooms, wallpaper there, new flooring in this part of the home, granite 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 and you make a decision that you would like to take a second mortgage for whatever reason. Now pretend you realized you could get a much better interest rate.You inform your loan officer about all the renovations in your home and how awesome it looks, etc. etc. Your loan officer tells you about how much equity you must have in your house and because of your amazing LTV they might let you cash-out some of that home equity. Regardless of whether you attempt to cash-out equity, your problem starts when the loan officer tries to get an appraisal. The real estate appraiser shows up and reviews your home and heads back to his or her office to type up his report. After analyzing the data he or she realizes there is a issue, your home is great ... Much TOO great for your location.

Your residence now becomes what appraisers refer to as "Functionally Obsolescent Due to Super-Adequacy". What this really means is that the upgrades you have made to your home are superior to the homes in your area and thus the law of diminishing returns has just kicked you in backside hard. None of the properties in your location have sold near as much to what your home SHOULD be sold for and without appropriate comparable documents proof of your property´s value is impossible. An appraiser will not be able to give 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 people looking to cash out or with low LTVs this might be a real deal breaker.

If you are concerned about this then you should consider contracting an property appraiser or estate agent to provide you a consultation. Select an individual that is familiar with your area because they will know more than anyone how much properties are selling for and what condition these properties are. Browse your area and search for signs in the yards. If you start to take note of a repeated broker then that is your good call for a contact. An property appraiser can go 1 step further and supply you a hypothetical sales price based on the changes you are interested in doing to your house. This should be tremendously helpful if you have bought a property as an investment.

The lesson here is to always know your market area which is typically defined as your immediate and surrounding neighborhoods up to one mile from your home. Know what houses sale for and the type of construction quality or amenities they have prior to starting big time renovations. If you must be Mr. and Mrs. Jones and do your own renovations, don´t be surprised when your home falls victim to the law of diminishing returns.

Copyright R C Smith, a young and bright real estate ace in the Houston and Austin TX areas. He manages Austin Home Appraisal along with Texas Appraisers