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How to Increase Appraised Value

In order to increase appraised value of a property, strategic actions must be taken to push the value of the property closer to and above similar properties that have recently sold nearby.

Determining what appraisers are looking at when appraising properties is important when one is increasing their appraised value. Deploying money to the most important aspects such as bedrooms and bathrooms, square footage, and interior finishes is key. This is key to boosting the appraised value.

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What is Appraised Value?

Simply put, an appraised value is a professional’s opinion of a property’s value. A professional appraising properties is known as an appraiser. Each state has licensing and qualifying exams that must be completed before they can begin performing appraisals.

They are appraising based on measurable property details such as square footage, the number of bedrooms and bathrooms. Appraisers are looking into sales prices of nearby properties, and considering the quality of finishes throughout.

How Do Appraisers Calculate Appraised Value?

Appraising a home comes down to a combination of three approaches. Those are the sales comparison approach, income approach, and cost approach.

The appraiser is good at determining which approach’s value is most relevant. They are deciding which values they should be giving more weight when writing their reports. The weights they are assigning to each method are different based on property type.

We will be diving into each of the different appraisal approaches below. Feel free to skip this next section. If this isn’t your cup of tea or you’re already familiar with them, you won’t hurt our feelings by skipping to the next section!

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Photo by J King on Unsplash

What is The Sales Comparison Approach?

The sales comparison approach is performed using recently sold properties in the area to determine a property’s value.

By finding recently sold properties nearby, the appraiser can determine what similar homes are selling for. Often, they are looking for homes close by that have the same number of bedrooms, bathrooms, and similar square footages. The more similar the interior finishes, the more accurate this approach is.

By compiling a list of properties (at least 3, preferably more) they can then begin making adjustments to value. Adjusting each comparable property’s value up or down depending on how it is better or worse than the subject property.

After adjusting all comparable properties, averaging the adjusted amounts produces the appraised value.

What is the Income Approach?

Appraisers using the income approach are mainly implementing it when appraising commercial and investment properties.

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Using the property financials, the appraiser is calculating the property’s net operating income. Net operating income (NOI), is the net income minus the operating expenses for the property.

Upon finding the NOI, the property value is found by dividing the NOI by the capitalization rate (cap rate). The capitalization rate is the expected rate of return on an asset. Appraisers are assigning cap rates based on their industry knowledge and market experience.

This calculation is finding the appraised value based on income the property is producing. Again, appraisers are mainly performing this approach on investments, especially commercial real estate.

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What is the Cost Approach?

The cost approach is another method that requires significant knowledge of real estate and construction. Appraisers are utilizing their full toolkit of skills for cost approach appraisals.

The cost approach is finding the dollar amount necessary to produce the same property today. This means finding land pricing, material and construction costs, and subtracting depreciation from the final number.

Although this method is difficult to execute, it is very accurate when appraising new builds. It is also great when there are no comps for a property, or it is so different that it’s not comparable to anything around it.

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Why is Appraised Value Important?

Appraised value is important because lenders are relying on it to make loans. When loaning buyers money to purchase a property, they get rights to sell the property in case the buyer stops paying their mortgage.

The property is what is called collateral, and the buyer is pledging it as security for the bank loan. Performing an appraisal lets the bank know how much the property is worth in case they end up taking it back and selling it.

Having professional appraisers allows banks to quickly and reliably get appraisals on properties before loaning on them. Appraisals can also be useful for homeowners looking to get a better idea of their home value before listing it for sale.

Improvements That Increase Appraised Value

There are a few improvements property owners are making to increase the appraised value of a property. For residential properties especially, bedrooms and bathrooms are an important metric.

In addition to bedrooms and bathrooms, the total square footage is important in improving the value as well. Since many appraisers find the average price per square foot in an area, having a larger footprint will inherently increase the value.

Bedrooms and Bathrooms

Bedrooms and bathrooms are the bread and butter for increasing appraised values. Comparing the amount of bedrooms and bathrooms is a quick way to find out how their pricing will be compared to each other.

A home that has two bedrooms and three bathrooms but is the same size as a property with three bedrooms and three bathrooms is going to sell for less.

Adding bedrooms and bathrooms can immediately increase the appraised value. If you or your clients have a large home with awkward or unused spaces, that is an opportunity to add another bedroom or bathroom.

For example, a home that has two bedrooms and three bathrooms but has multiple living spaces is a good candidate for adding a third bedroom. The cost of putting in drywall, a closet, and a door more than pays for itself on the appraisal and sales price.

Square Footage

Square footage is one of the most straightforward ways to increase appraised value of a property. The difficult part? Adding square footage to a property can be expensive, cumbersome, and time-consuming.

The reason why square footage is so important to appraised values is that when using the sales comparison approach, the appraiser is finding the average price per square foot of homes in the area.

When your property has more square footage but is just as nice, you can add significant value to the appraisal. For example, let’s take a look at a neighborhood where the average per square foot price is $200. If you house has an extra 12’x12′ bedroom or office, you have an additional $28,800 that will be going towards your appraised value.

Income Producing Capability (Commercial Real Estate)

For commercial properties, increasing appraised value can be as simple as raising rents and cutting expenses.

This is an advantage to commercial properties, because increasing their appraised value is much more objective than subjective when compared to residential homes.

Common Myths About Increasing Value

Some of the most common myths about increasing a home’s value are about additions that don’t pay for themselves. Updating kitchens and bathrooms incorrectly can kill value increases.

Adding swimming pools, hot tubs, solar panels and gardens are another addition that can add up to thousands (or more) and not pay you anything back.

Why Pools and Solar Panels Don’t Pay You Back

When deciding what you will be adding to a home to increase the value, avoiding swimming pools and solar panels is wise. They are expensive additions that do not increase the value of the home by the cost sunk into adding them.

The True Cost of Swimming Pools

Pools for example may cost an average of $50,000 in your neighborhood, but a home with a pool is only selling for $3,000 – $5,000 more than the comps. Adding a pool can be a huge loss that should only be done knowing that the money likely won’t be gotten back out.

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Solar Panels

Solar panels are showing up all across suburban America. Although they may be good for the environment and your utility bill, they aren’t helping your home’s value! Most solar panels require drilling into the roof. This can be creating roof leaks into the attic and ceiling of homes.

A homeowner that is moving and taking their solar panels with them are leaving behind a totaled roof. Most insurance companies are not insuring rooves with removed solar panels due to the holes being left behind in the shingles and decking.

When removing solar panels from a roof, many times the entire roof needs replacing. This is a sizable chunk of change going into a home right before selling it, that can be avoided by not installing solar panels.

Most appraisers will see solar panels as value neutral, but some may be subtracting value based on their knowledge of what is happening with solar panels today.

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Kitchen and Bathroom Value Hacks

Curious about improving appraised value without redoing the whole house? One of the most effective means of improving appraise value is concentrating capital in the kitchen and bathroom.

Selecting high-quality tile, granite countertops, and stainless steel appliances can add a quick boost to appraised value.

These are high-traffic and high-use areas that can absorb the extra cost of nice quality flooring and countertops. Improving these rooms with top notch materials is catching the eyes of appraisers and increasing the appraised value.

At a Glance

Overall, the appraised value is important when selling a home or when applying for financing on a home.

There are several ways that savvy homeowners are boosting their appraisals, and we dove into many of them. We spent time breaking down the calculations used to reach appraised value, and common myths about raising appraised values.

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Matt Moreland
Matt Morelandhttps://www.mattmorelandrealtor.com/
Matt is a real estate agent, investor, and entrepreneur in Texas, where he lives with his wife and three children. When he is not working on The Agent's Archive, he is helping his clients acquire investment properties, guiding new agents as they enter the industry, farming wine grapes, or working on something for his winery. In his free time he enjoys homesteading with his family, hunting, swimming, and backpacking.