Why appraisals can be inaccurate.

If you have been searching any of the real estate websites lately, you have surely noticed the offers to find out what your house is worth. If you have ever pursued this offer you were probably contacted by a real estate broker. The first thing they wanted to know was your time frame for selling and purchasing a new home. If you reply that you are just curious as to the value of your home, then they will remain polite and provide you with your value. This is called a basic CMA or competitive market analysis.

The problem with a CMA or an appraisal for that matter, is they do not take into account most cosmetic or decorative improvements when estimating value. Let's say your home is 1 block away from an identical house/floor plan that is already for sale. The homeowner of this house has not made any improvements and the property still features the builder grade materials used when the house was built.

Your home has had tons of upgrades. New hardwood floors, new carpet upstairs in all of the bedrooms, new kitchen cabinets and granite counter tops, a new master suite with double bowl sinks and a Jacuzzi jet tub, etc. You also scraped all of the popcorn ceiling finish off every ceiling in the home to return it to a nice flat ceiling desired by most potential buyers. You have also installed a brand new A/C unit. These are some very nice improvements to your property.

The real estate agent will provide their CMA to you and the value in this example is estimated to be $250,000.00 in Charlotte, NC. The same exact house 1 block over with none of the upgrades or improvements is valued at, you guessed it; $250,000.00 as well. How can this be?

CMA's and appraisals seldom take into account any upgrades that are considered cosmetic and, mechanical upgrades unless pointed out to the appraiser will be overlooked.

When I was an active real estate agent in Florida, I would meet appraisers at properties I had just helped my buyers to purchase. The first time I did this, I scheduled myself out of my office for two-hours. The appraiser showed up to the home, walked from the front of the house to the back and then came back out. He said thank you, got back in his car and drove off. I was totally dumbfounded. How in the world could he have made notes of the all of the upgrades to the house? When I asked my broker in charge about the situation she informed me that appraisers basically make sure the house is still standing, not vandalized or damaged (unless disclosed), verify the square footage and number of rooms. Appraisals are based on location, square footage and comps (other properties that have recently sold) in the area.

The fact that you invested $50,000 into upgrades for your home is really none of their concern. You didn't need to make these improvements. Someone else would be perfectly content with the builder materials when the home was originally built. As well, even though you recently installed a new A/C unit, the house originally had an A/C unit that was operational. If you needed to replace the unit, that is just part of homeowner maintenance.

Now, all is not lost. The good news is that your home will usually sell much faster than the other homes in the surrounding area that are not offering upgrades. Most people would opt for the house with the new hardwood floors, kitchen, A/C, etc., over the builder grade home for the same price any day unless the upgraded home was located at the edge of an airport runway. All things considered equal, upgrades will sell your home faster. But what about recouping your investment?

Some potential buyers will recognize the improvements and justify a greater asking price, especially if your real estate broker is pointing out all of the improvements. The problem might arise when the buyer goes to secure a mortgage and the appraisal comes back at $250,000.00 when they agreed to pay $280,000.00. Who makes up the difference? Either you drop your price $30,000, or the buyer comes up with an additional $30,000 in down payment money to reduce the risk of the mortgage lender, or a combination of both.

Appraisers typically come back with an estimated value that just happens to be equal to the contract price on the property. If the offer is for $250,000 then the appraisal is at $250,000. Of course if the last house sold within 5-miles sold for $150,000 then the appraisal will not equal the contract price no matter how many improvements were made.

Most everyone will make some kind of improvement to their home. New sod, a new sink, new flooring, etc. Don't make these improvements because you think you will get more money for your home when you sell it. Make the improvements because you will enjoy your home more with the improvements that are made. If you happen to make more money down the road when you sell the home that is just a bonus.

Many people watch the HGTV shows about flips and flops and the first thing any of the flippers say is, "the comps in the area are selling for..." If they cannot make the improvements and stay within the comp sale range, then they will not pursue the flip. Investing $100,000 into a home that then will need to sell for $450,000 to return a profit when the market will only justify a $300,000 sales price, does not usually work. There are exceptions, but usually this flip would result in a flop.

Lastly, keep in mind the old saying of, "location, location, location." If your property is sitting on a beautiful lake with a dock and has a horse stable on 20 acres then it will be valued much greater than the exact floor plan sitting on a 1/4 acre lot in a crowded subdivision. It's all relative but watch how much you spend on cosmetic upgrades. Just because you like black kitchen cabinets doesn't mean everyone else will. If a buyer doesn't like what you did, the value to you becomes an expense to them for they will conclude that they need to replace the cabinets.

If you are only going to stay in your house for a long period of time (10 plus years) then make the improvements that you want. You will have to live with the color or the design you selected for many years, so make sure you love it or you could be investing in your home again and again, without the opportunity to profit in the end.

#sellingahome