Home Renovations and Your Appraisal: What You Need to Know

May 1, 2014 by  
Filed under Solar Energy Tips

Now that spring is here, many homeowners are looking to begin their next home remodeling project. Whether you’re redoing the patio or finally putting in that new pool, you should remember that the value added from renovations differs widely based on a number of factors. The Appraisal Foundation has compiled some important tips to ensure your remodeling projects maximize your appraisal.

1. Cost does not always equal value.
First and foremost, homeowners should remember that appraisers do not simply add the cost of renovations to the value of a home. Instead, appraisers determine how much buyers are willing to pay for specific renovations in a marketplace, which often varies greatly depending on location. Homeowners considering renovations can research “cost vs. value” data by checking sources such as Remodeling Magazine. According to the magazine, some of the most common renovations that return the most on the investment are new front entry doors, midrange kitchen remodels, and bathroom remodels.

2. Remember the principle of substitution.
When evaluating renovations, appraisers rely on the “Principle of Substitution,” which essentially says that buyers would pay no more for a special feature in a home than the cost of renovating a similar property. Imagine that “Home A” and “Home B” are identical, except that “Home A” has had its kitchen remodeled at a cost of $50,000. Let’s assume that a similar kitchen remodel in a similar home can be performed for only $25,000. The Principle of Substitution says that the owner of “Home A” would not be able to recoup the full $50,000 paid for the kitchen remodel. Typical buyers desirous of a home with a remodeled kitchen would simply purchase “Home B” and renovate the kitchen themselves, saving $25,000 in the process. Of course appraisers also consider the value buyers might find in not having to go through the hassle of doing the renovation themselves.

3. Energy conservation features can increase the value of a home.
Appraisers take into account energy-efficient features (high-efficiency windows, solar water heaters, photovoltaic solar systems, etc.) However, the value of these improvements is based on what the market is willing to pay — which differs depending on the community. Homeowners can hire an appraiser beforehand to get a better sense of how much value a particular energy-saving renovation will add to their home.

4. Location is key.

The value added due to renovations depends on geographic region. For instance, a new in-ground pool will most likely add more value to a home in a warm-weather climate, where residents can take advantage of it year-round, rather than a cold-weather climate.

5. Maintenance can be as important as renovations.
An appraiser often takes into account the maintenance of a home including recent heating or air conditioning inspections, septic system servicing, roof inspections, and other types of inspections.

6. Keep your house tidy.
While a home’s tidiness/neatness isn’t officially evaluated in an appraisal, clean houses generally leave people — including appraisers — with a more positive impression. In addition, uncluttered homes make it easier for appraisers to perform a proper inspection, and may suggest that the homeowner performs regular maintenance on the home.

7. Keep your records.
It is important that you keep records of all inspections, additions, conversions, or other structural or significant work performed on your home, so that an appraiser can easily review it.

8. Don’t be afraid to communicate with your appraiser.
While homeowners are not permitted to unduly influence an appraiser, sharing relevant information about renovations to your home is absolutely appropriate. In fact, a competent and ethical appraiser will welcome information that makes his or her job easier, and leads to a more credible opinion of value.

We hope that these tips will help guide you through your next home renovation. Before committing to any project, remember that the value added to your home is based primarily on what the market is willing to pay. Keeping this in mind, along with the other tips we’ve shared, could help you increase your appraisal and ensure that you don’t spend money on renovations that don’t increase the value of your home.

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