Understanding Home Renovation & Appraisal Value in NYC
What the market looks for affects the value of your home
This week, we chatted with Michael Vargas, President and CEO of Vanderbilt Appraisal Company, a Manhattan-based appraisal firm. Michael has 20 years of valuation experience and his company has completed over 50,000 valuations in the tri-state area. Michael helped us shed some light on one of the most fraught aspects of any home purchase or sale: the appraisal. While the appraisal itself generally occurs as an owner is preparing to sell or refinance a home, most homeowners in the Sweeten community have an eye on future appraisals as they are designing renovations, even when they plan to enjoy their project for years.
What are the elements that you assess when calculating the value of a home?
Michael: The most important factors in the New York City market are location, size, architectural style, number of bedrooms, and overall condition of the home. We also consider kitchen and bath renovations, amenities, view, and natural light.
What do homeowners get wrong when thinking about the value of their own homes?
Owners tend to think about their homes in an emotional sense: there are often elements of a home that an owner treasures that may not necessarily translate to the value that the owner has assigned. For example, extras like a fireplace, balcony, storage, or custom-designed walk-in closet may indeed enhance value, but the gain may not correlate directly to the original cost of the work or to the owner’s sense of emotional worth. An individual owner may have been willing to spend a significant premium for a special amenity but the general market of buyers may pay far less of a premium upon resale.
That makes sense. The New York Times recently published an article about how very personal renovations can be hard to sell. What can you tell us about appraising those kinds of properties?
Anything a seller does to limit the pool of potential buyers can lead to a discounted sale price. When a homeowner creates a highly personalized style, buyers tend to treat the property in the same way that they would an un-renovated property; they seek to extract the cost to re-do the renovation so that they are not over-paying for a property that will ultimately require significant work.
Tell us more about how you would factor a more typical, straight-forward renovation into the value of a home.
The level and condition of a renovation is one of the most vital components in determining the value of the home. We look at the cost of the renovation, consider typical costs for a similar renovation, and assess the time frame since the renovation was completed.
A newly-renovated property can carry 100% of the cost of the renovation to the overall value of the home. As time progresses, the value of the renovation tends to diminish on the scale of approximately 20% every three to five years. After you pass the ten-year mark, the value of the renovation tends to drop dramatically.
What can homeowners do to increase the value of their homes?
The most value-enhancing renovation projects are kitchens and baths. A newly-renovated kitchen and bath can increase the value of a home by as much as 100% of the cost of the renovation.
So, if I renovate my kitchen for $30,000 and my apartment was last priced at $330,000, can I assume that the new value of my home is $360,000?
Yes – you can make that assumption, but remember that the market is not static; market prices can fluctuate. If market prices are rising and you spend $30,000 to renovate your kitchen, the new value of your home is $360,000 plus the amount (or percent) of market price inflation. Of course, the reverse can be true, during a market downturn, the value attributed to a renovation can decrease along with the home’s selling price.
Homeowners renovating with Sweeten want to gain and maintain that value in their home after a renovation. Do you have any tips on how to do this?
Most owners will see an immediate increase in value upon completion of a renovation project. During an appraisal, the owner should clearly call out the scope of the renovation as well as the related costs to the appraiser to ensure that the appraiser is accounting for the value of the work in the assessment.
We’ve been hearing for almost two years that New York City has very low inventory. Can that affect the appraisal?
The market in New York City is at historically low inventory levels. This situation tends to lead to rising prices, but it can also contribute to stagnation in the rate of sales. Demand can dissipate when buyers have such limited choice and are unimpressed with the quality of the properties on the market. Over the long term, however, we tend to see value escalate when inventory is low.
What determines the value of a home in Manhattan versus Brooklyn? Is there a difference that you can attribute to neighborhood?
The value of any home – whether it is in Manhattan or Brooklyn – is determined by the “principle of substitution”: the notion that the price of a home is set in accordance with other comparable, or “substitute”, properties. Market prices are ultimately localized, so owners and buyers should not directly compare homes in these two markets.
However, we have seen that what transpires in the Manhattan market can have an impact on the Brooklyn market. When market prices rise significantly in Manhattan, prime areas in Brooklyn also tend to rise. Although there has been recent convergence of value – some Brooklyn areas have comparable values to some Manhattan areas – there is still a large variance in value between the most valuable homes in Manhattan versus Brooklyn.
So, is now a good time to renovate or sell?
Given that inventory remains so low, market prices are likely to continue to rise over the next six to twelve months. This is a great time to renovate a property with an eye toward a future sale because by the time you complete the project, the net gain in value will be higher than the cost of the renovation.
If you’re ready to start your own renovation project, post on Sweeten to be matched with Experts who are perfect for the job!