This the real estate appraisal question that every homeowner, investor, and buyer wants to know the answer to. Yet, it isn’t one that can be answered very easily. There are some things that you must understand before we can take on this question properly. And the first one begins with, what is value?
What is value?
I am sure this seems like a very basic question, but trust me. Most people have no idea what value means, is, or where it even comes from. According to Dictionary.com, value means:
relative worth, merit, or importance: the value of a college education; the value of a queen in chess.
The key word in this definition is relative. Value in real estate isn’t something that can be nailed down definitively, but is merely an opinion. Which is why when you have 5 different appraisals on a property, you typically will get 5 different values returned. All of them can be sound in appraisal practice, yet yield different results as far as value.
This is because value is and has always been left of to interpretation. Take the example in the definition of the value of a queen in chess. To someone that is very new to the game of chess, they typically over value the queen and will run from confrontation once she is threatened. But to a seasoned pro, the queen can be quickly given away as a sacrifice if it will advance his agenda to ultimately win the game.
Value Depends
The point is that value is in the eye of the beholder.So, if you are dealing with a person that really wants to be on a corner lot, then that location might be very important and thus bring value to the property because it has a favorable location for them. However, a corner lot may represent extra traffic and yard work to the next potential buyer and they may favor this situation at all, thus the corner lot holds no additional value for them.
What makes Appraisal Value?
In order to have a value for a buyer or seller, all they have to do is have feelings. Feelings can really mix things up and make you even value something more based on the color of it.
But in the appraisal world, value doesn’t operate like this. Value is something that has to be tangible and real in the marketplace before the appraiser will put a higher price tag on it. Meaning, the market has to demonstrate that it is willing to pay higher prices for something and have done that with closed sales. Closed sales have been completed. The money and paperwork has been completed and transferred to make a difference.
So, when you say that you are going to add a wooden fence around your home and it should increase the value by $5,000, don’t be so sure. How has the market reacted to this and are people really willing to pay an extra $5,000 to price tag for something that cost $2,000 to construct.
Basic Rules
In down market’s like this, you are not going to get a major boost in overall property value by making one or two minor renovations. For example, adding a dishwasher to a property is not going to rock the boat as far as value for a property. But it might be a great decision as some buyers simply won’t purchase without a dishwasher in the property these days. I know that I am one of these types of people. And learning how to invest in real estate will teach you some of these basic things.
However, if you are learning how to buy foreclosure property and purchase one that needs some serious renovation work, then doing this total job will raise the overall property value of the property because you are going to move the property from being compared to trashed property to ones that have been recently renovated.
To change the value of a property or to add value to your property, you need to alter the condition rating of the property first. The condition rating is a subjective rating system that appraisers are trained on in the classroom and out in the real world with experience in their marketplace. This condition rating is the ultimate tool by which your property’s value will be judged by the appraiser.
So, if you just added new cabinets in your bathroom or put in a new tub, don’t expect too much additional value to your property cause that wasn’t a major job that is going to change the overall condition rating of your property. But you will see a slight increase in the value of your property, but won’t be anything to write home about.
The rule of thumb is that you typically get back about 75% of the value of your renovation, unless you are going to do something major to change the overall condition rating of the property. So our advice would be to be conservative in your renovation work, unless you are going for the home run with enough work to change the perception of the entire overall condition of the property if what you really want to do is add elusive value.
