What Upgrades Will Increase my Residential Property’s Value?

17 May What Upgrades Will Increase my Residential Property’s Value?

Let’s say you’re a house flipper. You bought your fixer-upper and want to maximize your profit. Your buyer will likely need a mortgage loan and therefore an appraisal. The buyer’s lender and appraiser will need to see the value to justify the much higher sale price over what you paid to buy the house. What improvements should you focus on to appeal to buyers and to support the eventual appraisal value?

Let’s say that you’re a BRRRR investor. You’ve purchased your fixer-upper and need to improve it before renting it out. In six months, you’ll conduct a cash-out refinance to recoup as much of your initial investment as possible. You want the appraiser to value the house as high as possible.

First, let’s clarify what we mean by value. One aspect of value is what a buyer or renter desires. If you provide enough value to a buyer or renter, they’ll pay a premium to live there. Value in the eyes of a buyer or renter include:

• Safe, well-lit location.
• Modern kitchen with newer appliances.
• Modern bathroom(s).
• A clean and freshly painted living area.
• Abundant parking.
• Normal to large bedroom sizes.
• Windows that open and close easily, and that have a screen.
• Curb appeal, which can include flowers, freshly cut grass, a new mailbox, and a freshly painted front door.

Now, let’s examine what an appraiser needs to see. Value in the mind of a buyer or renter is not always the same as value in the mind of an appraiser. The appraiser has to protect the lender to ensure that the collateral for the loan will be sufficient if the borrower defaults. Appraisers look at properties in terms of whether their condition is poor, average, or above average. Finished square feet, particularly above grade livable square feet, provide value. The number of bedrooms and bathrooms add value. Appraisers like to see improvements made in the past year and also in the past five years. Let’s examine some ways to increase the appraisal value:

• Increase the finished square footage. Can you add a heat source to a sunroom? Could you build an addition? What about finishing a portion of the basement or attic? (Livable square footage in the basement or attic will add value, but not as much as the main floors.)
• Increase the number of bedrooms. Is there a room that could be converted into a bedroom? Perhaps if you added a closet and a door?
• Increase the number of bathrooms. Could you add a half-bath in a bedroom? Could you convert a room into a full bathroom? Could you add a shower or tub to a powder room?
• Upgrade the kitchen. Stainless steel appliances, granite or quarter countertops, a new sink, new cabinet knobs, and modern light fixtures together will make the kitchen seem above average versus average.
• Upgrade the master bathroom and/or main bathroom. An updated bathroom or two will really help.
• Add a new HVAC system if the existing one is old. A really old HVAC system could diminish the value, whereas a newly installed system adds value.
• Add a new roof if the existing roof is old and leaking. Sometimes a roof repair will suffice.

Help your appraiser help you by giving him or her a detailed list of upgrades. Note all renovations made in the past year, and then include all upgrades in the past five years. Even if the prior owners made upgrades a few years ago, include those on the list.

Just because you spent money on a house does not guarantee that you will soon recoup that money. Some improvements don’t produce a positive return on investment. For example, widening and paving the driveway may not add as much value. Cutting down trees, or planting trees, may not add much value.

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Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai made colossal mistakes in investing (and learned some things along the way).  Tai has coached hundreds of entrepreneurs, real estate investors, and real estate agents on how to increase their income and net worth. He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.