Low Appraisal

[Angelo Wong]

Hi,

I recently purchased an investment property out at Memphis, TN last month - 4/2.5, nice schools, low crime, etc. and the appraisal came in at $140K.  Comps with better condition around the area was $155K (so -15K for condition).

So I threw in about 11K in for new paint, new carpet, new blinds, miscellaneous repairs in the house so I could maybe do a cashout refi.

Appraised it again, and it came in again at $140K.  But according to the previous appraisal it should have at least rised a bit, if not to $155K?

So basically it is saying that the entire cosmetic repair improved the house by $0?  I didn't do anything crazy like throw in granite countertops or anything like that.

2-part question: is it usual that these updates don't increase the value of homes at all?  Second, if it is unusual, what is the best way to have the appraiser reconsider the appraised number?

[Chris Mason]

Originally posted by @Angelo Wong:

@Chris Mason so I guess what are the places I'd upgrade to get an ROI out of it? Kitchen and/or bathroom? I know the upgrades depends on what neighborhood you're in, but is there any examples of what could be done?

I'm renting the place out right now for $100/mo above market but with an $11K cosmetic rehab to do that--not really worth it at all.
Yeah 20% is expensive, but I acquired it for $118900 -- so if it went up to $155k, it would have probably been a 20K pull-out (10% is still high, but I can actually do a bunch of stuff with 20K).

@Michael Medinger - this is great advice - though if I get an appraisal again with a direct wholesale lender, there's still no solid guarantee that the appraisal will come in at the right number, right?  Example: there is still a risk that this could have came back at 140.  That is, is it worth it to try again with a direct wholesale lender or nah?

 Generally, the crappier the stuff you are upgrading, the better your return. This is because a new kitchen costs what a new kitchen costs, the value of the value add depends on how crummy the old kitchen was. As a stupid example, you wouldn't spend thousands of dollars upgrading a 2 year old kitchen, because the 2 year old kitchen isn't crappy enough to make it worth it.

But let's do math for your "not really worth it at all" $11k upgrade that gets you $100/month more.

ROI = annual return / one time cost.

Let's assume one month of vacancy per year.

$1100 / $11,000 = 10%.

Are you good enough at picking stocks that you'd have gotten 10% ROI on Wall Street? I'm not at all convinced that you 'wasted' $11k. And remember, we arrived at that 10% ROI number using your numbers, not rosy pie in the sky dream numbers, but your actual real life numbers.

On top of that, if the upgrades got you a higher class of tenant, there should be time/hassle savings for you too.