Be Careful Not to Over-Pay or Over-Improve!

Perhaps you have experienced the following scenario. You’re enjoying viewing posts on your favorite social media. Up pops an ad. The ad is selling something that you are interested in. So, you take a closer look at what is being sold, and you like it. So, after mulling around the thought of whether you need it or not, you decide to make the purchase. Just as you get ready to hit the purchase button, you think to yourself, “perhaps it would be prudent to check and see if this item is being sold for less somewhere else?”

Low and behold, you find that this exact same item is being sold somewhere else for fifteen percent less! So, you purchase the item there instead, and pocket the money you saved by being resourceful. Does the fact that some places were selling this same item for less, indicate that there was a difference in quality? Not if the product is the same, or very similar.

This is simply a matter of shopping around and finding a better deal. If a person pays more for something, when they could have purchased the same thing for less somewhere else, it’s simply a matter of over-spending. While there may be a few that brag about spending more for something, than others have paid, in my experience, most people would rather spend less. In this situation, it is not a quality issue. It’s a price issue.

Now, let’s look at a different scenario. Say, you saw the same thing on that pop-up ad. So, you search the web and find something that looks to be similar. However, it is considerably less expensive. It’s a different name brand. While it looks nearly the same as the original product you were looking at, there is usually a reason why something is considerably cheaper.

The much cheaper price is probably due to this product being made with inferior materials. It may look and feel similar. However, as time goes by, you might find that the lessor quality becomes obvious. Perhaps the cheaper item starts to malfunction sooner or does not function quite as well as the more expensive brand. This reminds me of the adage, “You get what you pay for.” That applies to most everything from haircuts to home renovations. By the way, has anyone been using a Flowbee since the lockdown? Inquiring minds want to know.

Let’s now connect the dots to this situation and real estate.

OVER-PAYING

I recently appraised a home in a very popular neighborhood, in which there has been a tremendous amount of urban revitalization taking place in recent years. Many century homes have been completely gutted and renovated. They are selling like hot cakes! Of course, most real estate is right now!

My appraisal was for the bank. This was a purchase. The home was beautiful! The owner’s spared no expense in their renovations. The home had been gutted. The main staircase, which leads to two additional stories, was completely moved. The property had a new kitchen with all new high-end appliances and amenities. It could have been featured in a magazine! The bathrooms were just as impressive, with excellent quality finishes. The interior offered all new drywall, beautiful new trim, all new mechanicals, new custom flooring and new lighting throughout.

If you are looking for some ideas for your future kitchen renovation, check out these ideas!

The exterior offered a new garage, which was placed further back on the property so that the driveway could accommodate more vehicles. The exterior had new siding, with some nice ornamentation, a new roof, new windows, and a renovated front porch.

I have appraised a good number of homes in this neighborhood and know this market well. There were other renovated homes that are very comparable in terms of quality of construction and renovations. However, none have sold at the price that this property was selling for. And, in this neighborhood, overall sales trends have plateaued. I carefully searched for comparable sales. I read the MLS notes and carefully examined the MLS photos of the homes I was thinking of using as comparable sales. I spoke with builders in the area, as well as real estate agents, about the quality of homes in this neighborhood, as well as the sales I was looking at for market support.

They were all very similar in quality, amenities, size and overall market appeal. However, they all sold for less. So, while the property I was appraising had numerous buyers lined up, I was not able to find any support for the purchase price. This was, in my opinion, a matter of the home being over-priced, not over-improved. After all, there were very comparable homes in the neighborhood that had sold.

What are some things that might have led to the home I was appraising being over-priced? As mentioned earlier, they had spent a lot of money moving the staircase. Moving staircases and changing floor plans is a very costly thing to do. Further, remember how the garage was set further back in the yard to accommodate more vehicles? That means that a lot more concrete was needed, which cost more money, and yet, did not yield a good return.

Not all renovations bring a good return on the investment.

These were a couple of things that I noted that were not really over-improvements. They were just areas in which there was no major return on value. If not careful, it is easy to spend tens of thousands of dollars that will not provide a return on the investment, even in a hot market!

QUALITY DIFFERENCES

In this neighborhood, it is not lost on me that there were many renovated homes with an inferior quality of renovation. Kitchens, bathrooms, and other renovations, may appear to be similar. However, at a closer look the quality of some of these homes was inferior. Not all renovations are equal when it comes to quality! Some of this was obvious by reading the MLS notes and viewing the MLS interior photos, as well as taking a good look at the exterior of these homes. I did not use these homes, because, while renovated, they were not as comparable in terms of quality.

When renovating a home, an investor may use kitchen and bathroom cabinetry that looks fantastic! However, the quality differences are often seen as the years go by. The cheaper cabinets may start to break, or not work as well as they originally did, in a relatively short number of years. This can also be seen with appliances. Cheaper appliances often have a shorter life.

The same holds true with bathroom amenities. Whether we are talking about building materials, mechanical systems, appliances or any other aspect of a home, lessor quality materials don’t handle the wear and tear as well as higher quality items, typically. Therefore, there is usually a difference in market value. Homes with a higher quality of construction typically sell for more than homes with an inferior quality. Appraiser’s must be careful when it comes to quality differences.

NOT HITTING A NUMBER JUST BECAUSE IT IS UNDER CONTRACT

My opinion of the market value of the home I appraised, was less than the purchase price. While there were homes with very comparable quality that had sold in this neighborhood, none supported the contract price.

I was visiting with a builder who had built quite a few new homes in this neighborhood. They told me that they had a century home that they had renovated and sold. The bank appraiser came right in at the purchase price even though there were no comparable sales that supported that number. How did the appraiser accomplish this?

The appraiser’s job is not to view the purchase price as a target amount to hit!

The builder told me that they used new construction attached townhomes in the neighborhood, because, in the appraiser’s opinion, their “fit and finish” was more comparable to the property being appraised. Well, I personally don’t think that a new construction attached townhouse is comparable to a century home that has been renovated.

Furthermore, to use a new construction attached townhouse as a comparable for a renovated detached century home, is suspect to me. Especially when there are comparably renovated century homes in this neighborhood that have sold in recent years.

As I mentioned earlier, this neighborhood has been experiencing a great deal of urban revitalization in recent years. Sometimes, I will go back two years to find something truly comparable in terms of quality, and then make time adjustments, if supportable. However, in the case of the home I appraised, I found very comparable sales that had sold within the past year. Furthermore, sales prices in this neighborhood had plateaued, and were relatively flat over the past year. So, no time adjustments would have been supportable.

MY TAKEAWAY

I hope that you find this information to be helpful. Especially if you’re thinking of renovating a home. If not careful, it’s easy to add renovations that do not bring a much, if any, return on value. It’s also very easy to over-pay for materials. Whether you’re renovating using high quality materials or not, shop around. Be prudent about what you pay for your renovations. Because at the end of the day when it comes to renovations, while you may not be over-improving, but you might be over-paying!

Speaking of renovations, enjoy this video that highlights some funny home improvement fails.