Appraisal came back less after completing a $125k addition

[Aaron Frances]

Need some advice on a buy and hold I have. Are there any other way's I can document my rehab/addition to add more value to my appraisal for a cash out refi? Mortgage lender said there just aren't any comps in the .7 mile area to justify a higher value to what it is I did. I'm in Chicago. I can't buy my property any place else for anywhere under $650 but those are in different neighborhoods.

Several years ago I bought a 2 flat apartment building at 2500sqft for $220k. Used cash out of pocket for gut renovations of the 2 units which then appraised for $425k 3 years ago. I did a cashout then, further spending $125K to rezone and add an additional legal 1000 sqft apartment in the garden. My realtor said I likely have added $100k in additional value so my assumption was the value should appraise for $525k or greater. 

3 years later, after finishing the project I'm sitting on a 3500sqft property fully gut renovated that is only appraising for $423k. I'm scratching my head here. Cashflow is there, but I was truly banking on a 2nd Brrrr to recoup some of the renovation cost spent out of pocket for the last 7 years I've owned it. Super bummed here. Thanks everyone!

[Patricia Steiner]

This happens more often than you would think.  The market drives valuation - not the rehab.  And, yes, you can add square feet and still not increase value. The value is based on comparable sales within a 1 mile radius (sometimes more) in the past 30 days.  The cash flow method would not apply since it is limited to valuating commercial properties.  What you can do is:

Make sure the comparable sales are the most current and appropriate.  Were any missed? If the appraiser had gone out .5 to 1 mile more, would the comparable sales have changed?

Was your property correctly measured and adjusted to the comp sales?

Wait it out...in a lot of markets right now, property values and rents are appreciating quickly.  Enjoy the cash flow while you wait on the market.

Before doing any rehab/flip, know the market.  Over-improving is a "rookie mistake."  I also recommend choosing a realtor/broker who works in the investment/income market who will have a better grasp on valuation.

I'm sorry you didn't get the result you expected yet impressed that it is cash flowing well.  Keep the faith, learn from it, and move on to the next great deal.  Best...