Renovation projects create value for home owners in their maintenance of equity values, and creation of new value to be unlocked through the sale of the property. However, what many home owners don’t realize is that there is a discrepancy between what a potential would see as being a valuable addition to the property, and what the bank would see as being valuable. This mainly stems from the way in which bank-based valuations mainly stem from tangible appraisals, while individual purchasers will have their own preferences that influence their willingness to pay for a property. In order to meet in the middle ground, savers can take a moment to understand the appraisal process from a lender’s perspective, so that they can choose those renovation projects that will best meet their goals.
When a bank is looking at the tangible value of a property, it is important to remember that the lender does not take into consideration design aspects such as color schemes or carpet trends. As such, a lender will rarely see any value in the replacement of a nasty old shag carpet, or the repainting of pastel walls to being something more tasteful.
Even though both of these projects would likely improve the sale price of the property itself, and potentially even add a little bit of value to the appraisal, the renovation project itself would cost more than the improvement in value, and would not therefore create any value in a lending scenario. Banks are instead looking for the addition of physical capital to the property itself. As such, the framework to keep in mind when asking yourself if the bank will like the addition is a question whether or not there are new materials being added to the property.
One of the most consistently valuable additions that a home owner can make to their property is a new garage. Since the addition of a garage to a property includes new materials being added to the site itself, there is a tangible addition of value being made to the location that can be used as collateral. From there, because of the way in which a garage provides a functional addition to the home, it will increase the actual sale value of the property itself. This is an ideal multi-faceted value-creation situation. From there, homeowners can branch out to look at similar projects that the bank would consider.
For example, the addition of a deck is cost-effective, improves collateral value (incrementally), and would add functional/design appeal to the home for a seller. That being said, the addition of an aspect such as a 2nd-story balcony might be more aesthetic than it is tangible, and therefore not create equity value for a bank as much as it would a sale price, mainly because of the way in which it will cost more money than it will return.