Are You Over-Improving Your Real Estate?

So you’ve found the home you want to grow old in.  The location is good, the neighbors are great and the price was just right.  Now, like most homeowners in this situation, you begin doing minor improvements or upgrades to your home.  You add a little paint in a few rooms, some wallpaper, new flooring, and a light fixture here and there.

Finally, you are satisfied with your remodeled home.

Time passes and you decide you want to refinance for one reason or another.  Let’s assume you realize you can get a much better interest rate.  You tell your lender about all the upgrades in your home and how great it looks.  Your lender goes on to tell you about how much equity you have in your house and how you can cash out some of that equity.  Your trouble comes when the lender goes to order an appraisal.  The appraiser comes out and inspects your home and heads back to the office to write his report.  After analyzing the data he realizes there is a problem; Your Home is too Great for Your Area!

Your house now becomes what appraisers refer to as “functionally obsolescent due to super-adequacy.”  What this basically means is that the upgrades you’ve made to your home are superior to the houses in your neighborhood; the law of diminishing returns has just kicked you hard.

No homes in your area have sold anywhere close to what your home should be worth, and without comparable sales data to prove your home’s value, you’re stuck.  An appraiser is not going to be able to give a value to your home any higher than the highest sale price in the area. This might not be terrible for some, but for those looking to cash out, this could be a deal killer.

The lesson here is to always know your market area, which is usually defined as your immediate and surrounding neighborhoods up to one mile away.  Know what homes sale for and what type of construction quality or amenities they posses before you start major renovations.

If you must be Mr. and Mrs. Jones and overdo things, then be aware of the law of diminishing returns.

 Courtesy of : The Kiper Team Offices:(636) 898-123, HOTLINE: (314) 729-1010 CLICK HERE to email us.