What renovations will significantly increase appraisal value?

Question

Hi all!

I just put my first BRRR property under contract. I just wanted Bigger Pocket's opinion on how to increase value on a property. With those who have experience, what have worked for you? For those who don't have experience yet, what do you look for when purchasing a ready to move in home?

I'm trying to budget but maximize my ARV as much as I can. Does having a granite countertop in kitchens make a difference compared to laminate countertops? What are your opinion on vinyl plank woods in comparison to hard wood floorings? Should landscaping be apart of my rehab budget? Questions like these always raise a curiosity to me. I'm looking forward to everyone's opinion and suggestions.

Thanks,

Natisha

Bonnie Low · Answer

@Natisha Phouphayly - you should listen to the most recent Real Estate Rookie podcast on BP. I think it was episode #25. They featured an appraiser who is also an investor and asked him this exact question. His #1 advice for achieving value was to double check the square footage of every property before you make an offer because it's very common that the square footage is not accurate so you could greatly benefit if it's much higher than listed. Adding bedrooms to a house that is big but underutilized is also a big one. Like a 2/1 or 2/2 that is 1600 sq. ft - should be plenty of room for another bedroom, for example. Kitchens and bathrooms add value. But go to the podcast for much more detail. Good luck!

Dan H. · Answer

In our area the prefab granite is not much more than laminate, looks a lot better, and lasts longer.   The prefab does not look as good as custom granite, but you have to look close to notice.  We have purchased it for as cheap as $125 a 8’ segment.  Installation is more than laminate.  I suspect with the longer life that there may be no cost difference over the long term.

We use high end composite floors.  Some have real long warranties.  They look good and last fairly well. It will out last wood flooring in most rentals.

Do you note a theme?   Longevity is important for BRRRR.  You want to minimize tenant flip costs and time.   On any large value add, something unexpected will occur causing the value add costs to be more than the itemized cost.  Add, at a minimum, the greater of 10% or $10k to your value add budget (probably more for the 1st one).  We have done quite a few of these and have always exceeded our itemized budget.

BRRRRs typically rely on purchasing below market value.  We look for thrashed places to maximize the value add and we find it challenging to add significantly via the value add and we manage our own subcontractors.  Our goal is to have the value be double our rehab costs.  A $50k rehab, we want to have at least $100k of value added.  This only occurs when places are thrashed.  These types of properties are challenging to find in our market.  So the value add will only add so much; it is important to have purchased below market price.

Between buying below market and the sweat equity achieved in the value add, we hope to leave little or none of our money in the property.  In our market, the conservative refinance appraisals make this difficult.  I had to appeal the last two appraisals we have gotten.  The 2nd to last was absurd.  I got an $80k increase in the appeal and this was still significantly lower than what the property would have sold for. So refi appraisals are an under estimated risk of the BRRRR.Brrrr Is a good plan, but it is not easy.   It takes skill.   It takes patience.  It takes work.

It all starts with purchasing below a market value property.

Good luck

Jason Wray · Answer

Natisha,

Appraisers do not give a lot of positive gross adjustments for cosmetic upgrades.  Unless you are adding square footage additional bed/bath, pool, ADU, exterior reface.  You are spending a lot of money that will only improve the curb appeal to the interested buyers.  The problem with dressing up a home and spending too much money.  Always comes down to either the appraised value or how much more will the buyer pay over appraised value if it is in a hot market.  Banks will only lend on the true appraised value of the home not over.  So when you drop thousands of dollars on granite counter tops, over priced vanity, cabinets, appliances, flooring.  That will not have a huge marginal increase on the positive gross adjustments in a traditional market.  Does not mean you do not upgrade or renovate, just be frugal.

If the home is in an high end area like CA,NY etc in an expensive or desired location and people are buying for location and demand than that can sometimes make a difference.  But even developers in those areas go over board and try and get the money back plus profits they dumped into a project.  Only to find out that the developer and buyers have nothing in common.  I have seen a lot of people buy and save on material, cabinets, sinks, flooring etc from online classified ads or classified Apps. I can only offer advice from what I see after seeing so many appraisals and unhappy investors after finding out current value versus improvement costs/renovations.

Kenneth Garrett · Answer

@Natisha Phouphayly

As with all homes kitchens and bathrooms will return your best ROI.  Adding a bedroom from a 2 bedroom to 3 is a big improvement.  You’ll need a minimum of a 1000 square feet to pull this off.  When I BRRRR my projects I finish it almost flip ready.  It’s not much more money; it improves your ARV, rent amount and quality of tenants.  You’ll get your money back.  Be careful about over improving.  If the market warrants it then go ahead otherwise your wasting your money.

Jesse Morrell · Answer

@Natisha Phouphayly for example, I just bought a property for 60k cash at auction. The tax appraisal was 171k when I bought it.

It was vacant for eight years but in a nice neighborhood. It actually already had a remodeled kitchen with granite countertops, but it also had roof leaks.

I ended up putting around 30k into the repairs, doing 90% of the work myself except for what I had to hire out to a crew or a professional (roofing, some electrical, some plumbing). I kept the old bathroom vanities but put new cultured marble countertops on them and painted the bases. I also added a fourth bedroom. New windows. New appliances. New floors. New AC.  New hot water heater. These were necessary because the old were either missing or broken.

Nice bathrooms and nice kitchens please the buyers.

The goal is to 1) Please a buyer and 2) pass inspection.

So 90k into it and with the increasing prices in the area from the low inventory and low interest rates attracting lots of buyers, the house has gone from  market value of 181k-209k all the way from 209k-219k.

Anyways, I wasn’t trying to increase the value by each itemized repair as much as I was just trying to repair everything necessary to get the market value the house already had when I bought it. The appreciation over time was just a bonus.

Key principle is: you make your money when you buy.

You want to buy a property that you could immediately list for more money even if you didn’t do any repairs.

Jesse Morrell · Answer

@Natisha Phouphayly I don’t particularly try to increase value in an itemized upgrade fashion. I buy properties well below their market value and repair the house to the standard of the neighborhood. Once the necessary repairs are done and the house is functional and livable and up to the standard of the neighborhood, I can sell it at market value which is higher than my purchase price and repair cost.

However, adding sq ft of living space is one solid way to add value. I just converted a large uninsulated storage room into a livable nice fourth bedroom.

Bob Okenwa · Answer

@Natisha Phouphayly

Kitchens and bathrooms will get the most bang for your buck as these are the places with the most shiny things such as light fixtures, cabinet hardware, countertops, etc. The yard doesn't have to be an oasis, but it should be presentable and clean.

Alex Olson · Answer

@Natisha Phouphayly Is this a flip or a rental? What location is it in? If you put granite in, how long will it take to pay off the granite countertops? I would only put granite in if the area demands it. If it is a rental and the area does not demand it, I would look at doing IKEA countertops or something that is more new age but still laminate. It is SOOO much cheaper and still looks and feels awesome. As for adding value - depends on if this is a rental and what market you are in. In KC, the best bang for you buck are kitchen upgrades, adding a bathroom if possible, adding a bedroom if less than 3 bedroom house, and upgrading paint and flooring. You can also upgrade lighting really cheap by getting home depot/lowes fixtures. Hope that helps!

What renovations will significantly increase appraisal value?

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