How Home Appraisals Work for Home Renovation Loans
Get to know the process of "As-Completed" Appraisals for your home renovations
Home appraisals are an important and necessary part of any home loan process, whether that’s for a purchase, refinance or a home equity loan. And in these instances, an appraiser is looking to determine the current value of the home.
But when you apply for a home renovation loan — like a RenoFi Loan — to finance your entire renovation project, lenders will need an estimate of the value of your home AFTER the renovation has been completed, given that these loans allow you to borrow based upon this to maximize your borrowing power.
This is known as your home’s after renovation value and is based upon the improvements that you are planning to make to your house.
Understanding How Appraisers Determine Your Home’s After Renovation Value
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” valuation, and these appraisals rely on your renovation plans to evaluate the worth of your home in its future state.
You’ve probably heard of a normal “as-is” real estate appraisal that every homeowner needs in order to obtain a mortgage during the home buying process, but in this guide, we’ll explain exactly how an “as-completed” appraisal works to determine the future value of your home after renovations.
RenoFi requires an “as-completed” appraisal of your home, so it’s helpful to know the ins and outs of the process beforehand.
And specifically, we’ll take a look at:
“As-Completed” Appraisals vs. “As-Is” Appraisals Defined
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.
This means that you’ll have to provide RenoFi with your renovation plans, which involve several documents, but we’ll get into detail on that below to ensure you know exactly what you’ll need to supply.
Here’s how the appraisal process works for an “as-completed” appraisal for a renovation loan, vs. an “as-is” appraisal.
Three Steps to the “As-Completed” Appraisal Process
1. Submitting the Renovation Plans
During a typical “as-is” appraisal, an appraiser will tour the entire home and examine every aspect of the property. In an “as-completed” appraisal, the appraiser will use what’s considered a “Hypothetical Condition,” in order to adjust the home’s value based on non-existent (but proposed) features… those that will exist after your home renovation project has been completed.
And to give an example, let’s imagine your home’s current value is $400k, with 1,500 sq. ft., 3 bedrooms and 1.5 bathrooms.
Let’s also imagine that your 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.
You’ll need to get all of these plans in writing for the appraiser! Check out our downloadable RenoFi Loan checklist guide to see exactly what you need to get from your contractor for this appraisal and eventually for your application with a lender.
The two main documents you need from your contractor are:
- The Renovation Plans - Basic drawings from your contractor that will give your appraiser a good idea of where the renovation will be and what it’s going to look like. Proposed floor plans can be valuable here if square footage is being altered or expanded upon.
- Detailed Cost Estimate - A basic cost estimate for your renovation. This doesn’t need to be a complete line-item, itemized list, but it should break down the costs of the estimate, including labor and materials.
2. Evaluating the Renovation Plans
Next, your appraiser will be using these plans to come up with a “Hypothetical Condition,” based on these non-existent, but proposed new features. They’ll look at floorplans, photos, renderings and anything else you or your contractor can submit to get a better idea of the additions and changes that you’ll be making.
Hypothetical Condition: The condition that the improvements have not yet been completed or are under construction and your valuation is based on the completion of the improvements.
The appraiser will also look at the detailed cost estimate to get a better understanding of how much you’ll be spending on the changes and to determine how much value the renovation will add to the market value of the home.
3. Completing the Sales/Value Comparison
Next, the appraiser will look for other properties in your area that fit the metrics of your proposed home improvements, ie., the “Hypothetical Condition” of your home after the renovations have been completed. This approach is often called the “Sales Comparison” or “Value Comparison” approach. You don’t need to contribute any documents for this step.
Sales or Value Comparison Approach: The appraiser will estimate the future value of your home, after a renovation, by comparing it to homes nearby with similar specifications.
Step 1 is finding 4-6 comps that sold within the last 12 months in the same area to serve as a general baseline.
An appraiser will typically start with a wide net of comps (up to as many as 20-25 homes), generally looking for similarities based on:
- Zip codes, neighborhood, subdivision or school district
- Home style
- Number of bedrooms
- Number of bathrooms
- Square footage
- Lot size
As the appraiser begins to narrow down the list of comparable sales, he or she will focus on what specific qualities of that home will make it attractive to the same potential buyer. They consider the search through the eyes of that buyer and figure out which of the comps they would also consider during their home search.
What does an appraiser look at?
In Step 2, the appraiser will make positive or negative adjustments to the comparable home values based on factors that are relevant to that market. By reviewing sketches/floor plans,, the appraiser will look for any features and conditions that are different between the comparable homes and the home being appraised.
“These ‘comparable units’ will have different values in each specific market based on their demand from the people that live there,” says Craig Silverman, Principal and Chief Appraiser at Silverman & Co.
Top features home appraisals will focus on:
- Location Details - Property site & size, desirability of the neighborhood, proximity to local amenities, etc.
- Structure - Structural integrity, age of the home, construction quality, roof & foundation, code compliance, etc.
- Layout - Functional layout, square footage, additional beds and baths, finished basements, etc.
- Features - Central air, kitchen island, pools or spas, etc.
Other features home appraisals will look for:
- Curb appeal
- Recent renovations or upgrades
- Garage space (1 or 2 car garage, etc.)
- Storage space
- Design style (overall finishes & decor)
- Gutters and siding
Step 3 is reconciling the adjustments made to the comparable homes’ value based on the different factors mentioned above. For example, if the appraised home has a 2-car garage versus the comparable home’s 1-car garage in a market where off-street parking is highly desirable to potential buyers, a positive (+) adjustment will be made to the comparable to make it equal to the home being appraised.
But a feature must be quantifiable in the market in order for any adjustment to be made; meaning the potential buyers will specifically have a negative or positive reaction to it. It’s the appraiser’s job to determine the true value of each feature in the eyes of the buyer within that distinct market.
Going back to the previous example, using the Sales Comparison method based on Hypothetical Conditions, the appraiser will look for other 2,250 sq. ft. homes in the area with 4 bedrooms and 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 this.
Similar to “as-is” appraisals, there are distinct nuances to the process, but overall, this is what you can expect. The fewer similar homes or “comps” near your property, the harder it is to get an accurate “as-completed” appraisal.
That - in a nutshell - is the appraisal process you’ll go through with an “as-completed” appraisal to determine the future value of your home after renovations have been completed and below, we’ll share five things to keep in mind with these.
Not sure how an "as-completed" appraisal fits into your renovation financing plan?
Speak to a RenoFi Advisor to learn more.
Five Things You Need to Know about “As-Completed” Appraisals
1. “As-Completed” Appraisals are an Art, Not a Science
All appraisals are an art - not a science. But the same is true for “as-is appraisals. Three different appraisers could come up with three different values for one home using the same evaluation metrics.
With “as-completed” appraisals, your appraiser will generally not be touring your home and seeing every single feature first-hand, because these features of your renovation won’t be in existence yet!
And because as-completed appraisals are based on proposed renovation changes, appraisers have to rely on good “comps,” or similar houses in comparison to your home (after your home renovation project has been completed), to give an accurate appraisal.
It’s important to note that appraisers can only use “comps” of properties that have been sold recently. If you live in a rural area, finding good comps can be harder.
2. How Much “As-Completed” Appraisals Cost
The average cost of an as-completed appraisal is $600. However, this amount varies depending on location, property size, property type, value, and loan amount (loans greater than $250,000 require an interior appraisal, which costs more than an exterior appraisal).
Home appraisals could cost more than $1,000, depending on your property, but in general, the vast majority of appraisals that we at RenoFi coordinate hover around the average cost of $600.
While homeowners do pay for appraisals out-of-pocket, the maximized borrowing power gained from the resulting RenoFi Loan can dramatically dwarf this small cost.
Also, RenoFi’s role in this process is strictly coordinating the order - we solicit our expert appraisal partners for you, as they have a track record of success. The appraisal belongs to you, the homeowner, and is for your benefit.
3. They are Almost Always “Exterior Only” (For RenoFi Loans)
Because an “as-completed” appraisal is based on renovations that don’t yet exist, appraisers will most often perform an “exterior only” appraisal, meaning that they will not actually enter the interior of the home.
Their evaluation will be completed based on the documents that the homeowner turns in, comparisons of other homes in the area, and a quick drive-by to view the exterior of the home.
RenoFi utilizes an exterior only appraisal on most projects for a couple of reasons:
- Exterior only appraisals tend to take less time as there is no need to schedule a good time to do a walk though.
- It is also a less expensive appraisal.
Still skeptical about exterior only appraisals?
It’s important to note that RenoFi handpicks national appraisal partners that specialize in home renovations - and those companies hand pick local appraisers and we make sure our appraisal partners are experienced experts.
After all, we wouldn’t have a business if all of our homeowners got a $0 increase from their renovations, although we can’t promise specific increases.
4. They Rely on Detailed Plans from your Contractor
Homeowners that can provide their appraisers with accurate renovation plans, a detailed cost breakdown, and some photos have a much better shot at getting a more accurate appraisal than those who don’t.
However, if the documents you’ve submitted to RenoFi aren’t up to par - we’ll let you know, and even coordinate with your contractor to make sure your appraiser has what they need.
Unlike as-is appraisals, in most cases, as-completed appraisals do not involve a tour of the home, and appraisers are trying to understand the renovation plans as best they can from documents.
The obvious downside to exterior only appraisals is the appraiser doesn’t get to see the inside of the home. Therefore, the better your documents can paint the picture of your renovation, the more likely your appraisal will turn out.
We like to get homeowner supplied photos of the interior of the home to give the appraiser a glimpse into the property. The higher quality and larger quantity of photos you can provide, the better.
5. How long “As-Completed” Appraisals Take to Complete
“As-completed” appraisals take between 14-30 days from when you submit the necessary documents to when your appraiser will get back to you with the results.
However, outside factors, such as the COVID-19 pandemic or refi and purchase money volume, can affect this. Under normal circumstances, 14 days would be an acceptable wait time.
When these outside factors come into play, many people are waiting about a month just for their appraisal to come back.
How to Prepare for your Home Appraisal
While you can’t control market conditions, there are some things homeowners can do to help head off a lower value on your home appraisal. “The best way to prepare for a home appraisal is to provide the appraiser with as much information as possible,” Craig notes. If you’re planning a home renovation project, this is especially important for As Completed Appraisals.
“An appraiser can only make evaluations based on what they know. The homeowner can help by providing blueprints, floorplans, and a breakdown of the new features to be added, as well as the projected costs.”
But if your appraisal report comes in at a lower value than you expected, and you believe that there may be important information about your renovation that isn’t being considered or reported accurately, you can submit what’s called a “reconsideration of value” to the appraiser.
Why Are As-Completed Appraisal Values So Important For Home Renovation Loans?
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 borrowing power compared to alternative ways of financing home improvements such as a home equity loan, cash-out refinance or a personal loan.
We find that a RenoFi Loan can give you an increased borrowing power of 11x more, on average, than other options that don’t take into account the after renovation value.
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 about your planned renovation projects 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, but the best way to maximize the borrowing power of your home renovation loan is to get an experienced, professional appraiser who knows your local area very well and provide him with as much information as possible to accurately appraise your home after the renovation.
Interested in a home renovation loan? See how much you could borrow with a RenoFi Loan for your home renovation project.
RenoFi Can Give You Access To A Solid Network Of Real Estate Appraisers
Now that you know what goes on during the appraisal, you’ll be more than prepared to help the process run smoothly and RenoFi’s close partnerships with quality lenders has given us a solid network of real estate appraisers. This means that we can put you in touch with the best home appraisal experts near you.
Ready to get started?
Use the RenoFi Self Pre-Qualification tool to see if you’re a fit for a RenoFi Loan and borrow all of the money you need at the lowest rate possible.
Although an appraisal is an invaluable tool in assessing your project there is no guarantee that you will be approved for a loan from a RenoFi Partner Lender.