How Appraisals Work for Home Renovation Loans
Get to know the process of "As Completed" appraisals for your home renovations
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 home improvement loan specifically — like RenoFi’s home renovation loan — to finance your entire 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? It requires the appraiser to use a specific type of property appraisal, known as an “As Completed” Appraisal.
Here’s how “As Completed” Appraisals work for a home renovation loan.
“As Completed” Appraisals vs. “As Is” Appraisals
Appraisals for a home 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 home’s 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 about the current value of the property. 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. Similar to “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 about your home renovation plans that you can provide the real estate 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 square footage 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
Anything you can provide the appraiser to give them a better picture of your home post-renovation is helpful to the appraisal process to ensure they don’t come back with a lower appraisal than you deserve.
What Your Lender Will Need
After the renovations are complete, your bank or credit union will typically request a certificate of completion from the professional 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.
How Much Does a Home Appraisal Cost?
In most areas, a real estate appraisal cost will range between $300-$450 for a single-family home, according to Bankrate. Factors like home size, property value, property condition, and level of detail required in the appraisal will all help determine the final cost. Other certain items will typically inflate the cost of an appraisal as well, such as unique locations, extensive damages, lack of comparable homes in the area, or unusual features that require a little more detail and analysis.
Why Are Appraisal Values Important for a Home Renovation Loan?
One of the biggest advantages of a home renovation loan is that it’s based on the value of your property once all the renovations are complete, meaning a big boost in their borrowing power. For many of the homeowners we’ve worked with, we typically see that for every $100K invested in home improvements, there’s about a $75K increase in home value. Accessing that increased value upfront, along with any existing equity you have in the property, is HUGE in order to tackle everything on your dream home wishlist.
But if your appraiser doesn’t have all the necessary information regarding your home improvements and their costs, you could get stuck with a lower appraisal, which will only decrease your loan amount. You’re not about to settle for taking items off your home renovation wish-list, so you’ll end up having to go through the process of challenging the appraiser’s value. The best way to maximize the borrowing power of your home renovation loan is to get an experienced, professional appraiser who knows the local area very well and provide him with as much information as possible to accurately appraise your home post-renovation.
Finding a Home Appraisal Near Me
Now that you know what goes on during the appraisal, you’ll be more than prepared to help the process run smoothly. RenoFi’s close partnerships with quality lenders in your area has given us a solid network of real estate appraisers, so we can put you in touch with home appraisal experts near you. We’re here to help you prepare for your upcoming appraisal process, and discuss your specific home renovation project to find the right financing for you! Contact RenoFi today.