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Over Improvements

Be wary of houses that have over improvements. A homeowner creates an "over improvement" when they spend more money in repairs and/or upgrading than they gain in increased market value for the property. See section Basics Of Appraisal Depreciation.

Real Estate Expert Investing Advice FSBO Homeowners House Buyers Sellers Realtors Agents Brokers For example, I once did an appraisal on a house located in a neighborhood of homes that ranged from $475,000 to $700,000. The homeowner had purchased the house for about $525,000 and then a year later they spent another $430,000 to do more improvements to the house. They didn't just remodel the kitchens and baths for $430,000. They added a new floor on the house, they built an addition on the side of the house, they remodeled the entire interior, etc. When the work was completed the house was beautiful. The only problem was that they spent about $250,000 too much!! That's what you call an over improvement.

Since this house was located in an area where all of the houses ranged in value from $475,000 to $700,000, then this homeowner could not expect to sell the house for more money than the area could demand. If a typical buyer wanted to spend $955,000 on a house, ($525,000 + $430,000), that potential buyer wouldn't purchase this property because the market values of the other houses in this neighborhood weren't even close to that price. The potential buyer would spend $955,000 in an area where the value of the other houses all fell within that range. Therefore, the additional work the homeowner in this example had done, was not well-spent money from an investment standpoint. Now that doesn't mean that the homeowner isn't happy with the work they did. There is an amenity value for the property owner by living in a remodeled house that they're in love with. However, this is a subjective opinion of that particular homeowner. If the typical buyer would not agree with that same reasoning, then the excess renovation funds were not well spent from an investment standpoint.

Some people don't realize that just because they spend $1.00 in repairs and/or upgrading to their house, it doesn't guarantee that they're going to increase the market value by at least $1.00.

Some people don't realize that just because they spend $1.00 in repairs and/or upgrading to their house, it doesn't guarantee that they're going to increase the market value by at least $1.00. That's why homeowners need to properly evaluate any extensive work they're planning on doing before they spend the money to have it done. One of the best things for a homeowner to do is to hire a good appraiser to give them an "As Repaired" market value estimate. This is simply an estimate based upon certain conditions and/or repairs being completed. Sometimes, this type of appraisal is referred to as a Feasibility Study. An "as repaired " appraisal will be like telling the client, "Well, if you make the renovations and build the addition according to the building plans your architect has shown me, then the estimate of market value for your house when it's all completed will be $________."

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