New construction resell - improvements don't add value?

[Peacemaker]

I'm not arguing that it's the same market as when we purchased the home. I'm seeking information about the circumstances under which improvements result in an increase in home value.

This can change depending on market conditions. When you had a sellers market, with easy money being thrown around by lenders, people were willing to pay top dollar (anything, in some areas) for fancy upgrades. Now most places have a buyer's market, and there is a lot of competition. Lenders are tighter with loans, buyers can be more picky and have more negotiating leverage. You're just not going to see the same return that you did 5 years ago. No matter what HGTV says.

Also you can get to a point of diminishing returns, when you have a lot of upgrades.

I'm oversimplifying it terribly but in most neighborhoods, values trend toward the middle, over time. You could search for principles of regression and progression on here if you really want to know or have insomnia. My momma used to say you should buy the cheapest house in the best neighborhood you can afford.

You are fortunate not to be completely upside down.

 

[SutnNC]

Qwick note(s)-

How can it be said that all of these improvements have no affect on value (as demonstrated by comps), when no house with these improvements has sold before?

You have kind of answered your own question here with your question. The effects are measured by the reaction in the market. Taking the perfect scenario.....two houses are exactly the same with one exception. One has a three car garage and one has a two car garage. A buyer may OR MAY NOT pay a premium for that extra garage. Logic would tell you "yep, a minimum of "x" amount paid for the extra garage." The buyer begins to set the bar for that third garage "upgrade." Note: one buyer does not typically set the bar, the trend does.

What if the majority of houses in that neighborhood have one to two car garages and buyers are paying extra for a two car garage but when you drive through that neighborhood you don't see a single three car garage anywhere else? Tons of variables here but if the "neighborhood" is a "one to two car garage neighborhood" then that extra garage may not contribute a whole heck of a lot to that property (or nothing at all)....buyers are not paying for it. It may have cost thousands to add on (upgrade = no added value). Now if the floor plan began with a one car garage and another were added to total two you may likely see some added value if that is what the buyers in that neighborhood are paying for. This is where a local appraiser is priceless; they will or can determine if no data = no value or if there is data to reveal otherwise (historic, current or similar markets). It always depends on that specific area and what knowledge that person has in that area. Otherwise, the buyer has to pony up the difference (a concept totally lost in typical buyer/seller market). Buyers often think that upgrading is built in to value (mostly new construction buyers). That's another thread for another day.

Right now (in many markets, not all) there are many reasons why people are paying what they're paying and so many of those reasons you just can't physically touch (emotional, financial, motivation, whatever). Whereas before (around the time when you had purchased your house) these "things" were around but in a different context and could more easily be measured. This is where the knowledge and experience part comes in. While the less obvious can still be measured to some degree, verification of this activity needs to be done on a case by case basis (and it is widely not being done by the appraiser). By verification I mean the appraiser really needs to be in touch with his/her market by speaking to the other real estate professionals in an area. This is a concept widely overlooked by appraisers and it's unfortunate (fast and quick is the status quo for many lenders and it's showing).

Questions for you and your sale are what is being offered in your neighborhood? Are you willing to wait for a buyer to pay the premium? Are buyers looking at both the other houses and yours but not willing to pay any more for yours? What's the level of competition in your market area? It sounds like yours is near closing/closed but still a few points to take into consideration moving forward (among MANY others). Your agent should have prepared you for this scenario or at least have been able to explain it to you if it is a reality. You're in a tough spot because the appraisal reveals that buyers are not paying for them but you have one that wants to? Either way, it does happen. You and your buyer may (or may not) have been the victim of a McAppraisal, too late to determine that. Do yourself a favor and research AMC's (appraisal management companies) BEFORE you purchase your next home. Find out how the system has been manipulated to work against you for profit and not FOR you (and the general public's) best interest in mind. Share your findings with your friends and neighbors (we would appreciate it as well). When you find a lender ASK THEM WHO THEY NEED TO ORDER THEIR APPRAISALS FROM and research that company.

The reality may have been that the appraiser did his/her job for the lender by not valuing something that has little/no value in the current environment; it may have been over valued in it's listing/offering.

Back to you.....your question has pretty much been answered (by the posts) and I think in many markets (not all) one post says it very clearly for the majority of markets today....the upgrading is just "the icing on the cake." This is what is mostly selling properties in the area's that I cover. Higher cost/upgrading = higher return......no and not with most investments. House values don't "stand still or just go up," evident by yester-daze frenzy and today's drought. Think on a "need, want, really like it" basis when upgrading. The less somebody else needs/wants something the less they will be paying for it (even if you like it a whole lot !) I have have formica counter tops, my neighbors have granite. I could really care less what is put on them or how they're treated (for the most part), they panic with theirs. Their house is hardly worth any more than mine for it (I like granite too though) but may sell quicker than mine. It's a very sensitive thing. Some may like the landscaping in my yard (which is awesome and my own doing) but some may go for the granite. Overdoing it is possible with any type of upgrade. Be careful!!!

Moving forward- survey your agent (or agents) in the market that you are buying in. The contribution of any upgrade can be less than, equal to or in excess of it's cost. Markets are very specific in what they will tolerate. Be sure of the value you are seeking. Whether it's for your own enjoyment or future return on the investment. Nobody can see the future (not even us appraisers) but we can see where they are and may be headed based on the markets behavior. Staying in the "norm" is safe and doesn't typically pay big. Moving outside of the norm can bring big returns OR big loses. As a single homeowner, just treat your house like a house and don't bet the farm

Trying to outpace cost with value is tricky without some very specific local knowledge these or most days. Keep this next thing in mind too with the next house you buy....hire your own appraiser for the $400 or so. It's a lot of money to cut a check for but think of the value. It's a drop in the bucket compared to the effort it will take to pay that loan back (with interest for 30 or so years (or potentially be upside down in right out of the gate if you're not careful!) There is a ton of value in a local appraiser, just do your homework when shopping for one. Here is a starting point for you to begin hunting if interested:

http://appraisersforum.com/showthread.php?t=152157

Good luck

 

[Mike Kennedy]

I appreciate all the feedback. It's for my own edification at this point; we've already agreed to a lower sales price because we want to move to a different school district. I don't mean to imply that I actually consider real estate a game, but I want to learn how to make smarter decisions with the next house.

It seems that the smart money would be to make sure it's as nice as the other houses around it, but no better.

The red factor above is often a key value mover as "location location location" can easily impact Market Value as much OR MORE than the cosmetic upgrades you cited. To determine which upgrades (IF ANY) are in DEMAND in a particular neighborhood, attend OPEN HOUSE showings as often as possible........AND .......

retain the services of a LOCAL, Experienced, and Ethical Appraiser to perform Feasibility appraisals perodically BEFORE shelling out thousands of bucks on improvements which may have little or NO Market Value Impact i.e. Superadequacies/Overimprovements in a PARTICULAR local market.

Doing so will demonstrate what LOCAL buyers actually PAY for planned improvements as of a specific date in time. Disregard "flowery exclamations" on Listed Properties which tend to advocate Sellers' hopes, dreams, and aspirations parrotted by Listing Agents whose job it is to Advocate the Seller. Independent and Objective Appraisers are precluded by Law from doing so.

:icon_idea:The Old adage "measure twice, cut once" is appropriate prior to spending hard earned money on "personal luxury" choices (materials, features, additional amenities, design elements, etc.) in the WRONG location where Buyers (and Builders of new homes) clearly demonstrate those "upgrades" are atypical. In other words, determine HARD FACT data on typical local features and/or upgrades, PRIOR to investing in same.

 

[AnonApprsr]

That's partly my point. There have been no cases in my neighborhood where homes that have been similarly improved have been offered for sale. There has been no market reaction. The market has had no previous opportunity to react. Actually, the reaction thus far has been to offer to buy the house 2 days after listing and to offer a price $17,500 over the appraisal.

How does this do anything but enforce stasis?

After your house sells, it will not enforce stasis, it will enforce exactly what you want to happen. Just not for you. There always has to be a first house to sell for more money you know. The reason it happens is because the buyer wants it so much that they make up the difference. Maybe they don't really want your house that badly after all. If they did, they'd come up with the money. Or maybe those improvements aren't worth it if they won't. Don't blame the appraiser for the lack of buyer commitment. Sure, they think it's worth it if they can borrow the money, but not if they have to actually pay for it now. That tells you something, doesn't it?

 

[Walter Kirk]

The buyers are getting an FHA loan through "PNC Bank." Why does it matter who the lender is? How does that affect the appraisal? (Honestly don't know.)

Large banks like PNC use AMC's ( Appraisal Management Companies) to select appraisers. These AMC's generally choose the appraiser who quotes the lowest fee ( in many cases less than half of the fee paid by the borrower) and the fastest turn around time to complete a report. In many instances AMC's limit the appraisers to very recent sales which may not allow the appraiser to consider more appropriate comparables.

You note that the loan is FHA insured. At one time FHA appraisals were conducted bu appraisers chosen for their experience,knowledge and reputation. THE FHA got copies of their reports and did serious reviews. Today FHA appraisals are done by the same low bid people with no input from the FHA. Many experienced appraisers refuse to do FHA work due to the low fees paid.

I suggest that sellers who are unsure of the value of their properties have an appraisal completed by a local experienced appraiser. This appraisal can be used as a sales tool and provided to the buyer. The cost is low compared to the risk of loss based on a low listing price or low quality AMC appraisal by the buyers lender.

 

[JesseChunn]

Hi. I am currently a buyer and a seller, and I have been lurking around here waiting for (hoping for) answers to another question I posted, so feel free to ignore this post, but I felt compelled to make some comments...

First, the original poster stated that the house got an offer in two days, for significantly more than the appraised value. I see the phrase "market value" used by the appraisers posting here. I would think that things that are likely to cause a house to sell quickly are the same things that increase the market value of a house. In an area where all other things are equal, things like upgraded cabinets and countertops, additional finished areas (basement), an extra half bath, etc... would clearly (seems to me) bring additional value. The "market" is comprised of people that are looking for a home in that area, and they will be comparing other homes to this one. Any logical buyer would choose the house with the upgrades if the prices are the same. As a buyer myself, I would certainly pay more for the upgrades. Maybe not a lot more, but more than what this appraisal suggests.

To the seller, I would say that while those improvements may not be getting you a lot in terms of appraised value, obviously you gained in that you didn't have to wait while your home sat on the market for months or longer. Lots of people have almost given up on selling their home, or have had to reduce, reduce, reduce to the point that they are losing money. To the same point I made above, what you gained was a quick sell in a tough market.

Just my two cents while I watch for replies to my own question in another thread.

 

[SutnNC]

As a buyer myself, I would certainly pay more for the upgrades. Maybe not a lot more, but more than what this appraisal suggests.

This is where the buyer digs in and begins to set the tone for the upgrades (as an example, it could be a number of different things like location, views, etc.). You are somewhat correct in your thinking which is a logical approach but are missing the point of what is or is NOT supported by the market. The LENDER has no desire to lend anymore than what is supported in the market. IF buyers are getting upgraded homes for nothing and sellers are letting them go, then what collateral does the lender have if they take back the asset? They risk lending THEIR money on something that the market has no interest in paying extra on. Nobody wants to be the first and that includes the bank. You, as the buyer that "would pay more for it," need to pay the extra for what the "market" is not willing to bear. The burden is on the buyer of the unsupported asset (in any capacity), not the lender or the appraiser. By your post it appears that this is something that you understand but not fully.

So how much would you pay? That is up to you, not to be supported by the appraiser or the lender especially if a seller (and a buyer) have contracted above the market. If nobody is paying extra for the "extra's," what's it worth?

To the seller, I would say that while those improvements may not be getting you a lot in terms of appraised value, obviously you gained in that you didn't have to wait while your home sat on the market for months or longer.

This is effectively "the answer" for what appears to have occurred in that particular market. It's the icing on the cake. This is an example of the market forces at work....bottom line is if you want it right now and don't want to come out of pocket for it and no other buyers do either, you can't expect the bank to "dig in" and more than anything, don't expect the appraiser to "give it" value. Appraisers do not "give value"

("more than what this appraisal suggests)."

You need to keep in mind that markets are vastly different and what fly's in one does not necessarily fly in another no matter how basic or "obvious" it may seem.

We're getting our clocks cleaned because everyone "wants something" but nobody wants to "pay for it." This is especially true for new construction: base price is $220K, buyer (specific) upgrades are $50K in cost = contract for $270k?? That's another post for another time. Anway, some things to think about for your next purchase or sale.

Good luck

 

[kgfstl]

The reason it happens is because the buyer wants it so much that they make up the difference. Maybe they don't really want your house that badly after all. If they did, they'd come up with the money. Or maybe those improvements aren't worth it if they won't. Don't blame the appraiser for the lack of buyer commitment. Sure, they think it's worth it if they can borrow the money, but not if they have to actually pay for it now. That tells you something, doesn't it?

Just a bit more background: The buyers are getting an FHA loan. They don't have the means to make up the difference; they couldn't afford the 20% down to begin with.

 

[kgfstl]

Excellent advice

I'm so appreciative of the great advice I'm getting here. This isn't my first home sale, but it's the first snag I've hit. I'm learning a lot from it. I have some ideas for improvements to the next house, but you can bet your sweet bippy I'm going to consult with an appraiser first. You guys are certainly making your case!

 

[kgfstl]

Appraisal before putting home on market!

This is an excellent idea and I will be sure to use it next time. I really, really wish we had done it before this sale. Live and learn!

Large banks like PNC use AMC's ( Appraisal Management Companies) to select appraisers. These AMC's generally choose the appraiser who quotes the lowest fee ( in many cases less than half of the fee paid by the borrower) and the fastest turn around time to complete a report. In many instances AMC's limit the appraisers to very recent sales which may not allow the appraiser to consider more appropriate comparables.

You note that the loan is FHA insured. At one time FHA appraisals were conducted bu appraisers chosen for their experience,knowledge and reputation. THE FHA got copies of their reports and did serious reviews. Today FHA appraisals are done by the same low bid people with no input from the FHA. Many experienced appraisers refuse to do FHA work due to the low fees paid.

I suggest that sellers who are unsure of the value of their properties have an appraisal completed by a local experienced appraiser. This appraisal can be used as a sales tool and provided to the buyer. The cost is low compared to the risk of loss based on a low listing price or low quality AMC appraisal by the buyers lender.