Home Appraisal Guide For Home Renovation Financing and More

Chances are, if you’ve heard of home appraisals, you’re probably buying, selling, or renovating your home. When it comes to home renovation loans, home appraisals are crucial because the potential loan amount you receive from your lender heavily relies on your home’s assessed value. 

For this reason, it’s important to know exactly what a home appraisal is, how much they cost, and how they work. 

What is a Home Appraisal?

A straightforward explanation of a home appraisal is that it’s an impartial evaluation by a professional to determine the fair market value of a property. The duration of most home appraisals typically takes 1 to 2 weeks to complete. Most appraisals are completed within a relatively short timeframe because they are critical to the home loan processes. In some cases, it may take longer if there are specific challenges or unique features that require additional research or analysis. 

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.

Let’s discuss it!

Home Appraisal Factors

The home appraisal considers factors such as the home’s condition, location, and features to provide an unbiased professional opinion of its worth. By considering these factors and conducting a comprehensive analysis, appraisers provide an unbiased and professional opinion of a property’s fair market value, which is crucial for various real estate transactions and home renovation loan financing decisions.

Property Characteristics: Appraisers assess the property’s physical attributes, such as the size, number of bedrooms and bathrooms, lot size, and overall condition. They also consider any unique features or improvements.

Location: The property’s location plays a significant role in its value. Appraisers consider factors like neighborhood amenities, proximity to schools, parks, shopping centers, and transportation options.

Comparable Sales (Comp): Appraisers look at recent sales of similar properties (comparables) in the same area to determine how the subject property’s value compares to others.

Market Trends: Appraisers consider current real estate market trends, including supply and demand, property appreciation rates, and local economic conditions.

Home Improvements and Upgrades: Any renovations, additions, or upgrades to the property are evaluated, as they can influence its value.

Safety and Structural Concerns: Appraisers examine the property for any safety hazards or structural issues that may affect its value.

Zoning and Land Use: Appraisers consider the property’s zoning classification and whether it conforms to local land use regulations.

External Factors: Certain external factors, such as environmental issues, proximity to natural hazards, or noise pollution, may be considered.

Legal and Economic Influences: Appraisers take into account any legal or economic influences that could affect the property’s value, such as pending litigation or changes in local tax laws.

Overall Condition: The appraiser evaluates the property’s overall state of repair and maintenance, both inside and outside the dwelling.

Photographs and Documentation: Appraisers document the property’s condition and characteristics through photographs and detailed notes.

When Do I Need a Home Appraisal?

If you’re considering a home equity loan for a renovation project, you might wonder if an appraisal is required for approval. The answer is yes, whether you choose a home equity loan or a HELOC. The bottom line is you need a home appraisal whenever you are considering any type of home improvement loan. 

Home appraisals play a vital role in home improvement loans by determining the value of your property, allowing lenders to calculate the maximum loan amount based on your Loan-to-Value (LTV) ratio. This value compares your outstanding mortgage balance with the appraised value of your home. A favorable appraisal increases the chances of loan approval, while a poor return on investment may impact lender confidence in lending. Appraisers consider factors such as property condition, neighborhood desirability, and comparable sales data to assess the property’s value accurately. 

If you apply for a RenoFi Home Improvement Loan to finance your renovation, lenders will assess your home’s potential after renovation value (ARV) once completed. The higher the after-renovation value, the more you can borrow. 

Expert Tip from Tom Yoswa, Sr. Loan Officer at RenoFi

After renovation value is more favorable toward renovation lending than LTV, hence why many opt to use RenoFi home improvement loans. RenoFi Loans are highly preferred renovation loans because RenoFi also supports homebuyers during the home appraisal process in order to help get the best possible after-renovation value towards your loan.

Most Common Types of Home Appraisals & How Much They Cost

There are six main types of home appraisals:

1. Full Appraisal: Aptly named, a full appraisal will involve a total inspection of the interior and exterior of a property. This is what a vast majority of mortgage loans will use to determine a home’s value. These appraisals typically cost an extra $500 - $3,000 depending on square footage.
2. Exterior-Only Appraisal: Also referred to as “drive-by” appraisals, these assessments involve only the exterior of the property as the appraiser never enters the home. It typically costs less than a full appraisal since there is much less work being done. They are typically used for appraisal reviews or stand-only second-lien mortgages. The cost of exterior-only appraisals typically ranges from $150 to $350. These appraisals are less expensive than traditional full appraisals because they only involve an external inspection of the property. 
3. Rental Analysis: These appraisals are done for loans on investment properties and are an addendum to a full appraisal. Unlike a full appraisal that compares the property value to comps sold, a rental analysis compares the property’s potential rental income to other leased rental homes in the same area. These appraisals typically cost an extra $150 - $200 since it requires additional work. 
4. Broker Price Opinion (BPO): This type of appraisal isn’t very common, especially when buying or refinancing a home, and it isn’t actually conducted by an appraiser but via a broker’s opinion. Also known as an “appraisal lite,” the assessment is most often used for mortgage insurance cancellations on an existing home loan. They cost anywhere between $150 - $300.  
5. As-Is Appraisals: As-Is appraisals evaluate a property’s current condition and market value without considering any planned renovations. They are used for property purchases, refinancing, or home equity loans based on the property’s existing state. The cost of an As-Is appraisal typically ranges from $300 to $500.
6. As-Completed Appraisals: As-Completed appraisals assess a property’s value after renovations or improvements have been completed. They are essential for home improvement loans and refinancing projects that require the property’s post-renovation value. The cost of an As-Completed appraisal is generally similar to that of an As-Is appraisal, ranging from $300 to $500.

“As-Completed” Appraisals vs. “As-Is” Home Renovation 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.

RenoFi requires an “as-completed” appraisal of your home, so it’s helpful to know the ins and outs of the process beforehand.

3 Steps to the “As-Completed” Appraisal Process For Renovation Loan Financing

1. Submit 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. Evaluate the Renovation Plans

Next, your appraiser will be using these plans to come up with a “Hypothetical Condition,” based on these nonexistent, 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.

The hypothetical condition is 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. Complete 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.

Remember: the sales or value comparison approach estimates the future value of your home, after a renovation, by comparing it to homes nearby with similar specifications.

Appraisers will also need to find 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, neighborhoods, subdivisions 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 during a valuation?

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
• Appliances

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.

For Example:

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.

Doing this without a trusted advisor can be very difficult, we highly recommend you consider partnering with RenoFi in order to get the renovation appraisal process done well in order to secure the funds you need.

The 8 Steps to The Home Appraisal Process

Step 1. Preparation: The appraiser begins by gathering essential information about the property, such as, as its address, size, and unique features. They also review any relevant documents, such as property records and recent sales data in the area.

Step 2. Property Inspection: The appraiser conducts an inspection of the property. They thoroughly examine the property taking note of the property’s condition, layout, and any recent renovations or improvements. Please note that how the property inspection is conducted varies on the type of inspection. 

Step 3. Comparable Sales Analysis: After the inspection, the appraiser researches recent comparable sales (comps) in the neighborhood. These are properties similar to the subject property that have sold recently. The appraiser uses comps as benchmarks to assess the property’s value. They will typically find 4-6 comparable homes that sold within the last 12 months in the same area to serve as a general baseline. They’ll typically start with a wide net of comps (up to as many as 20-25 homes), generally looking for similarities based on:

• Zip codes, neighborhoods, subdivisions, or school district
• Homestyle
• Number of bedrooms
• Number of bathrooms
• Square footage
• Lot size

Step 4. Data Analysis: The appraiser analyzes data from the property inspection, comps, and other relevant market data to determine the fair market value of the property. 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.

The appraiser will also 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.

Top Features All Home Appraisors Will Look For:

• 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 all 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
• Appliances

Step 5. Valuation: Appraisers begin to quantify features 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.

The appraiser employs one or more valuation approaches, such as the sales comparison approach, income approach, or cost approach, depending on the property type and market conditions (discussed later).

Step 6. Home Appraisal Report: Based on the inspection, analysis, and valuation approaches, the appraiser prepares a comprehensive appraisal report. This document includes details about the property, the appraiser’s assessment, methodology, supporting data, and the final appraised value.

Step 7. Report Delivery: The appraiser delivers the completed appraisal report to the client, typically the lender, homeowner, or relevant parties involved in the real estate transaction or financial decision.

Step 8. Review and Decision-Making: The client reviews the appraisal report to assess the property’s value in relation to the intended purpose, such as a mortgage application, refinancing, or property sale. Based on the appraised value, stakeholders make informed decisions.

How Does The  Home Appraisal Process Work When a House is Under Construction? 

You can get a home appraisal while a home is undergoing construction via a Subject-To appraisal.

A Subject-To appraisal is often done during new construction, or when the home hasn’t been constructed yet at all. In this scenario, your initial appraisal value may come back lower than expected. Hence, you have the option to finish the first phase of construction, then get a subject-to-appraisal. While the value is still based on the hypothetical condition after construction, it is also able to be done before or during construction to help keep projections consistent with the actual plans as the home or renovation progresses. 

Home Appraisal Approaches to Valuation 

There are also some different approaches that these appraisals can each take to determine the value based on their purpose.

Cost Approach
This method is based on the premise that the value of a home should essentially be equivalent to the cost of building an identical structure. The idea here is that investors should never spend more to purchase a property than they would to build the same property from scratch.

To determine this, this is what an appraiser will do: 

• Calculate the cost of replacing the building, depreciation, and the land’s value
• Subtract depreciation from construction costs
• Add the land’s value

Sales Comparison Approach
For a Sales Comparison approach, also known as the Value Comparison approach, appraisers will utilize real estate comps of recently sold properties within the same market and asset classes to determine the value of a home. They’ll look at 3+ properties with similar features, conditions, age, etc., and drill down on discrepancies to adjust the valuation accordingly. 

Income Capitalization Approach
This approach believes that a home’s value should be based on the revenue it generates. This is calculated by subtracting the operating costs from the revenue, giving you the net operating income (NOI), then dividing this number by the cap rate. Since this valuation approach depends entirely on revenue, it is obviously not the best option for primary homes.  

5 Expert Tips for a Smooth Home Appraisal with Home Improvement Loans:

1. Compile an Appraisal Package: Prepare a comprehensive package including a listing copy, sales contract, comps previously used, list of major updates, and more. Inform appraisers of any previous home upgrades or improvements completed with invoices for added thoroughness. Present it neatly to the appraiser at the valuation’s beginning, arranged by your realtor.

2. Enhance Curb Appeal and Make Low-Cost Cosmetic Upgrades: Opt for budget-friendly enhancements to boost your home’s visual appeal such as;

   • Landscaping: Trim bushes, mow the lawn, and plant flowers to create an inviting exterior.
   • Fresh Paint: Apply a new coat of paint to the front door, shutters, and trim for a polished look.
   • Light Fixtures: Upgrade porch lights and add solar path lights for improved nighttime aesthetics.
   • House Numbers: Install new, visible house numbers to enhance the property’s identification.
   • Mailbox: Replace or repaint the mailbox to match the overall curb appeal.
   • Pressure Wash: Clean driveways, sidewalks, and exterior surfaces for a refreshed appearance.
   • Minor Repairs: Fix any visible defects like loose steps, cracked pavement, or loose railings.

   Expert Tip from Samantha Pearlman, Realtor at Keller Williams Elite:

   To potentially boost your property’s valuation, consider presenting it in a well-maintained and “Show” condition, even if you’re not actively selling. This approach can create a positive impression on the appraiser and imply diligent property upkeep, potentially maximizing its value.

3. Remember As-Completed Appraisals are an Art: As-Completed appraisals rely on proposed renovation changes and good comps, as appraisers won’t see the renovations firsthand. There are two main aspects to an As-Completed Appraisal for renovations you must do well for a smooth approval.
   
   Submitting the Renovation Plans: In an As-Completed home appraisal after renovations, the appraiser will use the Hypothetical Condition, in order to adjust the home’s value based on non-existent, but proposed, features that will exist after your home renovation project has been completed.  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. Submitting 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.

4. Understand the Variables Impacting Cost: As-Completed appraisal costs vary based on location, property size, type, value, and loan amount, with some exceeding the $700 average.

5. Provide Detailed Plans from your Contractor: Accurate renovation plans, cost breakdowns, and photos increase the likelihood of an accurate appraisal.

6. Access a Trusted Real Estate Appraiser Network: RenoFi connects homeowners with quality appraisers experienced in their specific market.

RenoFi Can Give You Access To A Solid Network Of Real Estate Appraisers

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.

RenoFi Loans 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.

This is why RenoFi helps homeowners through every step of the way - including the appraisal process.
Interested in a home renovation loan - Ready to get started? Use the RenoFi Self Pre-Qualification tool to see if you’re a fit for a RenoFi Loan today.