An updated home is typically an easier sell than one that needs a lot of work. Buyers can effortlessly envision themselves in a move-in ready property. In addition, many buyers are spread thin and lacking renovation funds after a purchase. If your property is outdated or the condition is below-average, buyers might be drawn to the pricier, updated home down the street where the value of improvements is rolled into the cost.
However, before you rush to call a contractor, know that upgrades don’t guarantee a higher sale price. Home projects rarely result in a 100% ROI. In fact, some updates add little to no value, even if they’re a selling point for buyers.
Today we’re tackling over-improvements. This is a topic that real estate pros often encounter, but it isn’t as well-known to homeowners.
what's an over-improvement?
Over-improvements are upgrades that exceed what is typical for the neighborhood. 74% of buyers finance their home purchase and nearly all of these buyers will have an appraisal requirement from their lender.
Appraisers determine property values by analyzing sales data. Objectivity is key in this role. Appraisers don’t speculate how much value something like a pool adds to the property—they need data to prove it. There are different appraisal methods depending on the property and its usage. The sales comparison approach is the most common type of real estate appraisal.
understanding location dependence
So, what happens if you’re the only one in the neighborhood with a pool? For the sake of simplicity, let’s say you live in a very uniform subdivision. Every house is a 2,000 square foot 2-story built within the last 3 years. With the exception of your new salt water pool, your house is identical to the house next door that sold for $500,000 last week. You just accepted an offer for $535,000 that’s contingent on an appraisal. How will the appraiser account for this price difference?
First, the appraiser might adjust their parameters. They could increase the time range to check older sales in your neighborhood, but that doesn’t help if we know you’re the only one with a pool. They might extend their search to include nearby neighborhoods with similar houses, but they still can’t find any comps with pools. Surely there has to be a “rule of thumb” valuation for pools, right?
WRONG. Real estate is entirely dependent on the property’s location. Appraisers don’t make adjustments unless they have the market data to back it up. This applies to any upgrade or feature: granite counters, top-of-the-line appliances, outdoor kitchens, barns, oversized garages, etc. You can have finishes fit for a king, but they’re only worth what can be determined by the market or what a buyer is willing to pay out of pocket.
In the case of the $535,000 home with a pool, let’s assume the appraisal came back at $500,000. Maybe that buyer loves pools and has an extra $35,000 that they’re willing to use to bridge the appraisal gap. Congratulations! You successfully sold at your desired price while contributing a data point for pools. On the flip side, if the buyer cannot or does not want to pay more than the appraised value, you can either lower the sale price to $500,000 or put your house back on the market knowing that one appraisal did not adjust for the pool.
Maybe you’re wondering why they can’t determine the value based on the area’s average cost to install a pool? Remember that appraisals using the sales comparison approach determine what buyers are paying for similar homes. Just because ABC Pools quotes $70,000 to install a pool with the same specs as yours, that doesn’t mean that most local consumers are willing to spend $70,000 on a pool. In fact, given the lack of pools in our hypothetical scenario, pools clearly aren’t popular in your immediate area.
to go all out or not?
If you want luxury upgrades or unique features for your own enjoyment and you have the means to do so, go for it! First and foremost, your house should be a place that you love. If, however, you’re upgrading strictly for a perceived ROI, do thorough research or enlist the help of a real estate professional. There’s a finer line than many homeowners realize between routine replacements, valuable updates, and over-improvements.