How Appraisals Work for Renovation Loans
When buying a new home, your mortgage lender will order an appraisal to evaluate what the home is worth today. When you’re applying for a renovation loan like RenoFi’s renovation home equity loan to finance a home renovation project, the lender will want an estimate based on the future value of the home. But how does an appraiser determine the value of something that doesn’t exist yet? Here’s how “As Completed” Appraisals work.
“As Completed” Appraisals vs. “As Is” Appraisals
Appraisals for a renovation loan take a different approach than a standard appraisal - also known as an “As Is” Appraisal. Unlike “As Is” Appraisals where the home’s existing features are used to determine the value, “As Completed” Appraisals are valued as if the new features being planned in the renovation already exist in that home on the effective date (inspection date) of appraisal.
Before the appraiser can complete the Sales Comparison Approach, which identifies similar, recently-sold properties in the area based on the home’s current conditions and features in a typical appraisal, they’ll use what’s considered a “Hypothetical Condition,” in order to adjust the value based on non-existent (but proposed) features.
Let’s imagine your home today is worth $400k with 1,500 sq. ft. and 3 bedrooms, 1.5 bathrooms. Let’s also imagine the kitchen hasn’t been updated in 20 years. You’re planning a $150k renovation to add 750 sq. feet which will include a new kitchen on the first floor and a new master suite on the 2nd floor. When all the renovations are complete, your home will be 2,250 sq. ft. with 4 bedrooms and 2.5 bathrooms.
When conducting an “As Completed” Appraisal, the appraiser doesn’t care what your house is valued at right now. Instead, using the Sales Comparison method based on Hypothetical Conditions, they will look for other 2,250 sq. ft. homes in the area with 4 bedrooms, 2.5 bathrooms that have been recently updated. If 5 houses in your area match a similar description and the average price point is $525k, your home will be adjusted based on that value. Like “As Is” Appraisals, there are distinct nuances to the process, but overall, this is what you can expect.
What Materials do an “As Completed” Appraisal Require?
The more information you can provide the appraiser, the better. In order to make credible valuations on features that don’t exist, they need a clear picture of what will be there when all is said and done. These materials may include:
- Copy of the contract between the owner and contractor, including the complete description of the finalized renovation plans.
- Detailed cost breakdown by line-item to be used for the project
- Proposed floor plan (if floor plan is being altered or expanded upon)
- Architectural or design drawings used by the contractor
- Any permits or licenses that were obtained or will be obtained to complete the renovation
What Happens Next?
After the renovations are complete, your bank or credit union will typically request a certificate of completion from the appraiser to validate all the work you said would be done actually was. Don’t worry, this doesn’t require a reassessment. It simply ensures that x, y and z were all completed in order to substantiate the new appraised value.
Now that you know what goes on during the appraisal, you’ll be more than prepared to help the process run smoothly. To discuss your specific home renovation project or your upcoming appraisal for a renovation home equity loan, contact RenoFi today.