You can, in fact, influence appraisals. That’s right, there are certain things you can do to affect your home’s value. To be clear, proper valuations and the appraisal process involve rigorous scientific methods. But because the valuation process is both science and art, human biases are inevitable. In other words, some elements of the appraisal will always come down to the appraiser’s judgment. And that’s a good thing if you want to know how to increase home value for the appraisal process – by introducing improvements before selling or refinancing with a home equity loan, construction loan, and so on.
This leads us to the question, “With the multitude of ways to increase value, how do you know which ones are worth your effort?” This blog post lists what I think are some of the notable projects you can undertake to improve value. We’ll start with the low-hanging fruits and work our way to more challenging upgrades.
How to add value to your home (Summary)
If there’s one message you take from this article, it is this part. Understanding how certain projects add value to your property is a lot more valuable than memorizing lists of upgrades. Specifically, the net benefit concept is vital. You can then assess yourself if an “improvement” improves your home’s value or if it negatively affects the home appraisal.
Valuation methods appraisers use
There are three basic valuation methods. These are the (1) Income Approach, (2) Market Approach, and (3) Cost Approach.
The proper approach to take will depend on many factors. (Refer to the preceding link for a full explanation.) But for estimating home appraisal value, the appraisal process will revolve around two approaches: the market approach and the cost approach. Your appraiser will most likely use these two.
The market approach compares your property to nearby homes and to similar homes from other locations. Completed transactions of these properties are also known as comparable sales. Suppose your home is a 3-bedroom 2-bathroom property, and a recent sale on a comparable home – also a 3-bedroom 2-bathroom house – was around $100,000. In that case, your property’s probably worth $100,000, give or take.
The “give or take” here relates to how your property is better or worse than similar homes.
Suppose your property is better than similar homes because, say, it’s a corner lot (assumed to be a desirable trait). If so, then the $100,000 warrants an upward adjustment.
How much the appraiser adjusts your home’s appraised value will also depend on nearby homes or similar homes. So if a similar corner lot sold for a premium of $5,000 versus similar properties, then $5,000 might be a reasonable upward adjustment to your property, too.
And because there aren’t exact replicas of properties in the market, the appraiser will probably make adjustments based on experience and knowledge. In short, she’ll make adjustments based on judgment and, inevitably, biases.
(Related: How to Value an Apartment Building)
The cost approach considers what you’ll spend to make the same property – either with the same materials or similar use.
This is a major reason why the home appraiser visits your property. They check to see the condition of your house. An older property will probably have a lower resale value due to the need for repairs and maintenance.
They also check things like the number of bedrooms and bathrooms, living spaces, and amenities. While your home’s square footage is fixed (total lot area), improvements are not. And improvements, particularly the right ones, increase the value of your property.
Homebuyer vs. appraiser
Another consideration is whether or not the person estimating your property’s value is an appraiser sent by the lender or a prospective buyer. Why does this matter? Because, although a potential buyer might listen to the recommendation of an appraiser, the buying decision is ultimately an emotional choice. And decisions made on emotions are probably irrational.
Information makes people think. Emotion makes them act.
All this means is you’ll have a greater influence on the home’s appraised value with a potential buyer than an appraiser. (I’m using the phrase “appraised value” loosely here, where it is also the price a prospective buyer is willing to pay.)
For example, suppose the color orange has sentimental value to a potential buyer. In that case, she might assign a premium on your orange property. In contrast, an appraiser sent by the lender will not mind the color of your walls – assuming comparable properties are of equal quality.
The premise of adding value
While home renovation improvements add value to your property, not every project should be pursued because they don’t come free. Which projects should you then undertake? The formula is simple: Pursue projects that improve the property more than they cost to make. In other words, always think of the net benefit rather than the value-added on a standalone basis.
This concept may seem simple, but in reality, most homeowners over-improve their properties. The homeowner initiates improvements that are valuable to her rather than valuable to the prospective buyer. Or, say, flooring that’s serviceable but is replaced anyway. The replacement may or may not result in a net benefit.
So before we proceed with the list of home improvements to make before selling or refinancing, always consider both benefits and costs, and if you’re coming out with a net benefit.
1. Clean up the house
Cleaning up is a contentious point with a home appraisal. Many say the appraisers sent by lenders are trained to look past garbage, unwashed floorings, and things of that nature. But to me, this is a classic case of not knowing your bias.
Daniel Kahneman’s book, Thinking, Fast and Slow, highlights how humans tend to have biases without knowing. They conducted a study where two groups, real estate brokers/agents and business students, were asked to value real estate. To put it briefly, both groups had an anchoring bias. But how they perceived their performances is interesting.
The business students knew about their biases, while the real estate brokers/agents were pretty sure they were unbiased. So despite being biased, the real estate agents and brokers believed they were purely objective. That’s a dangerous mindset for a real estate agent or broker to be in.
In my opinion, because the appraiser is still a human being with emotions, her judgment can be influenced. Let’s say through the appraisal process, property inspections left her with a nasty image. I wouldn’t be surprised if comparable sales adjustments, which are subjective, are then anchored downward.
Now, a messy property isn’t going to be the reason for a crucially low appraisal. But the point is to clean the house anyway, just to be sure. And I haven’t even mentioned potential buyers of your property. If they’re coming, then you absolutely should clean up!
Wondering how to add value to your home on a budget? Painting is easy and relatively cheap. This applies to the home’s exterior – curb appeal (see the next item) – and interior – retouch the interior with paint.
Most recommend neutral colors over trending ones, but there will be exceptions. It’s always best to assess what’s tasteful for your property type. Nevertheless, fresh paint is the quickest way to get a higher appraisal.
3. Curb appeal
Aside from fresh exterior paint, landscaping also affects curb appeal – the house’s appeal to a prospective buyer from the sidewalk.
Landscaping is also relatively easy to do, especially with today’s boom in gardening resources. And although curb appeal is the hardest to quantify due to its subjectivity, you certainly can tap on your buyer’s emotions if it’s a look that interests them. This means closing on a larger purchase price.
4. Minor repairs
Before a home buyer or appraiser visits your property, ensure everything’s up and running. This implies fixing broken lights, damaged floorings, or leaking faucets.
Again, always mind your repair costs and consider if it results in a net benefit. But for the most part, minor repairs cost less than the home value increase you get by fixing them.
5. Finishing unfinished projects
Even though finishing unfinished projects can turn out costly, there’s a good chance that the improvement adds significant value and results in a net benefit.
This refers to any incomplete projects on the property. The cash outlay to finish, say, an unfinished bedroom should be less than building a new bedroom from scratch.
6. Add a bedroom
Adding a bedroom can significantly increase property value. Comparable sales are almost always first categorized according to the number of bedrooms and bathrooms.
That said, adding a bedroom can be tricky. You’ll have to see if there’s enough common space to justify adding a bedroom, if room flow makes sense, etc. The renovation, though, from a 1-bedroom house to a 2-bedroom house, should be worth it if you’re looking to increase the appraisal value – especially if the appraisal is done by a licensed appraiser.
Of course, there’s a cap to the increase in property appraisal value. For instance, turning a 4-bedroom house into a 5-bedroom house will, at best, marginally increase market value.
7. Add a bathroom
As previously mentioned, comparable sales are almost always categorized according to the number of bedrooms and bathrooms. So for the same reasons, adding a bathroom can increase market value, all things equal. Due to plumbing requirements, though, adding a bathroom is typically more challenging.
Also, it might make sense to increase the bedroom count first. Nevertheless, if the property’s size and existing attributes justify it, adding a bathroom can also significantly increase your home’s property value.
8. Luxury home amenities
The effectiveness of luxury items, like a pool addition, in increasing fair market value will depend on the market for your property. A swimming pool is the favored upgrade for class A or B houses.
How to increase home value for appraisal
Whether you’re looking to sell or refinance, understanding the appraisal process helps. So begin by understanding why improvements increase your property’s fair market value.
These are just some of the ways to increase home value for the appraisal process. A licensed appraiser will probably be more objective than a homebuyer. Still, objectivity just means the increase in home value is predictable – an additional bedroom will increase the property’s value. The lack of objectivity by most home buyers also isn’t a disadvantage. In fact, it’s why some houses sell for a lot more than the appraisal value.
And finally, when deciding on which upgrades to make, always consider both costs and the added value. Unless it costs you nothing, not all improvements ought to be pursued. Be mindful of which projects give a net benefit, where the benefit outweighs the costs, and go after those projects.