The Risks of ImprovingYour House

So you and your family have found the piece of real estate you want to get old in. The lot is good, the people are awesome, and the asking price was just right. Now as with the average house real estate investors in this situation you begin doing small renovations or upgrades to your piece of real estate. A little paint in a few rooms, maybe some wallpaper, new hard wood in this room, granite in that room, a fixture here a fixture there. Finally you are satisfied with your now changed piece of real estate.

Time passes and you make a decision that you would like to take a second mortgage for one reason or another. Let’s pretend you realized you could get a better interest rate.You begin to tell your lender about all the improvements in your piece of real estate and how awesome it looks, etc. etc. Your lender tells you about the large amount of equity you must have in your house and as a result of your low loan-to-value ratio they might let you cash-out some amount of that home equity. No matter whether you attempt to cash-out equity, your issue starts when the lender goes to order an appraisal. The real estate appraiser goes and inspects your piece of real estate and returns to the office to write his report. After analyzing the information he or she see that there is a issue, your piece of real estate is huge . . . Much TOO great for your location.

Your home has become what appraisers refer to as “Functionally Obsolescent Due to Super Adequacy”. What this really means is that the upgrades you have made to your piece of real estate are much higher than the homes in your area so now you investment is in the negative. No homes in your neighborhood have sold anywhere close to what your piece of real estate SHOULD be worth and without comparable sales documents to prove your piece of real estate’s value you’re stuck. An appraiser is not going to be able to grant a value to your piece of real estate any higher than the highest sale price in the neighborhood. This may not be so bad for some, but for people looking to cash out or with low LTVs this could very well be a real deal breaker.

If this really concerns you then you might consider contracting an real estate appraiser or estate agent to provide you a firm opinion. Select a person that is familiar with your area because they will know more than anyone how much homes are being sold for and what condition these homes are. Walk your area and take notice of signs in the yards. If you begin to write down a common name then that is a good call for a contact. An real estate appraiser can go one step further and give you a ”subject to” selling price based on the remodeling you are considering doing to your house. This can be tremendously helpful if you have bought a estate as an investment.

The moral of the story here is to always are aware of your market area which is normally defined as your immediate and surrounding neighborhood and subdivisions up to 1 mile from your home. Know what homes are going for and what type of construction quality or amenities they posses prior to starting major renovations. If you must be Mr. and Mrs. Jones and do your own renovations, don’t be surprised when your home falls victim to the law of diminishing returns.

Article Source: http://www.real-estate-article-directory.com

This article was written by R Chandler Smith, an accomplished real estate expert in the Austin area. He oversees Austin TX Appraisals

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