Home Improvements: What counts towards the appraisal?
I am often asked which home improvements “count” towards the appraised value of a house. This is never an easy question. Many people envision a list of improved items with predetermined relevancy, along with a specific dollar value assigned to each of those items. I will explain in this blog entry why that is not feasible, or reliable approach.
There are many items that comprise the totality of a house. For example: Walls, roof, heating and air conditioning, electrical and plumbing systems, garage, the deck , kitchen cabinets, counter tops and backsplash, bathroom fixtures and flooring, laundry room, interior doors, ornamental trim and hardware, etc. As you can see, this list could easily reach into the thousands. It is hard to imagine a potential buyer going through a house, with a physical or mental list of all these items. More likely buyers will walk away with a general impression of the house like, “That house has a lot of updates,” or, “That house needs a lot updates.” Or even, “The kitchen and bathrooms have a lot of high end materials,” or, “There weren’t any kitchen or bathroom updates, but the windows, roof and furnace are new.”
With the multitude of building components included as part of a house, it’s is unlikely that an appraiser could evaluate a home efficiently or accurately on a check list basis. A more realistic approach is to describe the house in terms of its level of property maintenance and updates.
The first step in evaluating the physical condition of a property is to take inventory of all its updates. When I set an appointment to look at a house I always ask the homeowner, or agent, to provide me with a list of improvements made to the property. I am often asked, “What items should I include in this list?” My answer is simply, “Everything!” A comprehensive list will provide me with a good sense of the maintenance level the home has received. Some items may seem relatively minor on their own however as a whole, all of items play a part in establishing the overall physical condition of a house.
The next step in evaluating a property’s overall physical condition is to consider its age. Taking that one step further, an appraiser will determine both chronological age and effective age. Chronological age refers to the actual age of the dwelling. Determination of chronological age is relatively easy. The year built is usually contained within public tax records. Effective age refers to how old the structure appears to be or “feels.” A house that was built 80 years ago, with many significant improvements completed over the past 20 years (such as kitchen and bathroom renovations, roof and window replacement, heating and air conditioning replacement, etc.) is likely to have an effective age closer to 20 years rather than 80 years.
For further refinement, appraisers also place their observation into two categories, updates and upgrades. Updates refer to the physical condition of the home, while upgrades refer to the quality of construction materials used. A house can have a brand new kitchen renovation, with all mid to lower end materials such as vinyl floor, laminate counter tops and press board cabinets. Conversely, a kitchen can have all the finest appointments, including imported hardstone countertops, a costume designed glass tile back splash, solid wood cabinets and high end, built in appliances however, with no remodeling completed within the past 20 years.
Now that the overall property condition and construction quality of the house has been evaluated, one might ask how this is incorporated into the final appraised value of a house. Many people have some familiarity with the comparable sales approach to estimating market value for real estate. Using this method, the appraiser examines recent sales of similar homes in the neighborhood. These sales provide insight into actual market reactions. When multiple, comparable sales are analyzed, market preference trends become apparent. In many markets that I service, it quickly becomes apparent that level of property condition and construction quality are two of the most important factors in buyers’ purchase decisions.
Upgrades and updates will almost always very from house to house. One house many have an updated kitchen while another may have updated bathrooms. One may have new heating and air conditioning systems, while another has new windows. Yet another may have new laminate floor in the living room, with the other has imported Brazilian hardwood flooring. When employing the sales comparison approach it is impossible to compare updates and upgrades on a line by line. There would be a lot of back and forth comparison, with much of it falling into the “comparing apples to oranges” category. This is where the level of upgrades and updates we established earlier comes into the equation. Through MLS listings, agent interviews, and public tax and building permit records, an appraiser is able to establish an overall level of updates and upgrades for the comparable sales, in the same manner as they did for the property being appraised. In an ideal world, the comparable sales will fall within the same range overall updates and upgrades, demonstrating market reaction to homes with a similar level of physical condition and construction quality. The dollar amount of what typical buyers are willing to pay for a particular level of upgrades and updates is reflected in the sale price of the comparable sales analyzed.
As you can see, individual home improvements items don’t always impact the appraisal on their own however, in consideration of their contribution to the overall level of property condition and construction quality ….. it all counts!