Calculating Value after repairs?

Question

Is there some standard calcuation that investors use to estimate how much the value of a property will increase after they make certain repairs and improvements? 
I am planning on redoing the roof and siding of a building that I just purchased, and want to estimate how much it could potentially increase the appraised value.

Scott Miller · Answer

When rehabbing a commercial property, one needs to do some of the things already mentioned in addition to studying the house pricing trends, rent levels and prepare a cost/income estimate.

The rule of thumb I suggest my client's use---for every $1000 invested in improvements should increase your net operating income of at least $200 per annum or a 20% return on capital.

Some of you might choose a 10% ROC, others might prefer a 40% return on capital---the margin you use isn't my point.  What matters is that before you jump into renovating a property, take a realistic view at the amount of increased cash flow a repair will likely produce based upon investment in time, effort and the monies required.

By budgeting for the cost of repairs, you avoid overimproving the property relative to its surroundings (neighboring rental properties) & keep your project in line with prices (average rent levels) your buyers (tenants) are willing to pay.

Here is a formula one can use for these purposes:

Max. Repair Costs = Improved NOI After Repairs/Desired Return on Capital

Example:

Let's assume that rents for a similar unit in your area are between 900-925 and your units in need of repair are currently rented out for 800.  Using a 20% return on capital, one should limit rehab costs not to exceed 6000-7500 per unit.

Here is how the formula works:

Low side calculation:  1200 (100 in increased rents x 12 months) / .20 (return on capital) = 6000 for allowable cost of improvements
High side calcuation:  1500/.20 = 7500

Again, these specific returns may or may not apply in your market, but it's the notion of budgeting and the method for calculating your max. allowable repair based upon cash flow that is the lesson.

Regards,

Scott Miller

Account Closed · Answer

Hopefully by now you realize that some repairs make no difference in the value but still help get the place sold. People buy what they can see and expect many things to be up to a certain standard. They do not value individual items. They value the total package. They compare the property to other properties that they like and buy the one that like the best.

Hence many repairs do not improve the value. Some do but that is even hard to break out.

As James noted you can get an appraiser to educate you as to what they look for when valuing a property. For a minor fee they can offer you an opinion or tell you what things are holding back the value compared to other homes generally on the market.

Good RE agents can also offer opinions of what is helping the value and what is holding it back.

Tanget.

An investor I have spoken with will buy real junkers. They cut the grass, clean out the trash, sometimes quickly paint the front (front only) and then sell the property as a handyman's special. They can earn a great return on the tiny amount of work they invest and they avoid all the issues with a larger project (finding things that you did not expect when you open the walls, roof, etc). Some of his projects are major refurbishments but some really are just tarted up and resold.

John Corey

Lenox Ramsey Jr · Answer

mkazee thats a hot concept that I never thought of before

Michael Kazee · Answer

In my opinion you really need to get to know your market, talk to appraisers in the market, get to know them let them know what you are doing. Ask them before you ever buy the property what comp sales are going for in the area and ask them to be conservative (no good comes of being optimistic before the sale, plan for the worst I say). Then I break it down like this

ARV
-3% Sellers Agent
-3% Buyers Agent
-3% Closing Costs
-3% Concessions
-estimated repairs x120%
-Initial closing costs (include inspections and appraisals)
-I plan on 8-10 months of hold time depending on season.
-purchase price
-desired profit (I plan on $10,000 for any investment up to 30k and an additional 5,000 for every 30k after. ie 30k purchase price I want to net 10k, 60k purchase I want to net 15k, 90k purchase I want to net 20k)

= Maximum allowable purchase offer price

Here is a sample deal on one I am in right now.

Purchased property for 52,000 (reo)
inital closing costs including inspections and appraisals 3600
renovation costs 19000
holding 10 months @ 750 a month ... 7500
Conservative ARV $120k minus my 12% (see above)

arv                          120000
12% final costs         14400
holding costs            7500
renovations              19000
purchase price          52000
estimated net profit    23100

I wanted to make atleast 15k because it fell between the 30-60k range for inital purchase price and if it sells early great, but I always start with talking to an appraiser and seeing what the conservative ARV will be and go backwards from there. I hope that helps with your question.

N/A N/A · Answer

I never thought about it that way, but I suppose the average home buy isn't too interested in that type of thing.

Lynn Z · Answer

If you refi, your bank will appraise it -- most will not give out any information until after you've closed your loan.  They can be low and they can be high but at least you have a professional giving you a value while protecting their client--the bank.   It's a stupid policy because you're supposed to insure it appropriately and the best FMV estimate may be the appraised value.  If I hear "we're on your side" from another mortgage broker I'm throwing up.  If they were on my side they'd give me the appraisal results so my insurance guy and I can insure the property appropriately.

Frank Adams · Answer

I don't think there is a formula per se for what you are asking. I've seen things before like you get back 90% of the cost of a kitchen or bath, 85% of landscaping, 95% of interior paint, etc, but I don't think that's what you're asking.

On most rehab related things, I try to figure what is FMV of this unit AFTER I have done the everything to bring it into "easily marketable" condition? and how much more than that cost can I get the current owner to let it go for?

IMO a roof has NO ENHANCED VALUE for the simple reason that the bare minimum buyers want from a house is a ROOF OVER THEIR HEADS, and a house without a roof, or with a visibly damaged roof is unsellable. Although I've often gotten HUGE discounts on a house because an owner was either convinced that a roof was a much bigger deal than it actually is, and/or they didn't have the funds to tackle the job.

Bad housing and roof pretty much means that potential buyers won't get out of their cars because the curb appeal is so bad! Yum Oh!

all cash