Keith Negley/Munro Campagna
New appraisal laws and decreased home values are diminishing the appraised value of many home improvements and the perceived return on investment of higher-end improvements in particular. To help homeowners make remodeling decisions with confidence, it’s not only what you know about appraisal valuations in the current economy, but also who you know among appraisers, and how you use those relationships.

What You Need to Know

On May 1, the Home Valuation Code of Conduct (HVCC) took effect. “The idea was to create a situation where appraisers could do their job without undue influence from any party to the transaction, and that’s a good thing,” says Jim Amorin, an appraiser in Austin, Texas, and 2009 president of The Appraisal Institute, which represents about 30% of the nation’s roughly 100,000 appraisers.

But there have been unintended consequences. Turnaround time for appraisals tends to be longer under the HVCC. There may also be less data for appraisers to use if comparative sales have been slow — and less attractive data if those comps have sold at depressed prices.

In addition, the HVCC compelled many lenders to outsource the appraisal-management process to third parties. They take a slice of the fees, with the result being that a number of highly experienced appraisers have left the residential market, Amorin says. Stepping into the void: less-experienced appraisers “who have never seen a down market,” may have come from 100 miles away, and therefore may lack personal knowledge of specific neighborhoods and markets.

How It’s Playing Out

Generally speaking, “It’s not a good idea to over-improve to the degree that you have the best home in the neighborhood,” Amorin says. “In a hyper real estate market, you can get anything. But in a depressed market, the likelihood of recouping many investments is reduced.”

Jennifer Cote, an appraiser in southern N.H., agrees. “If you put in top-of-the-line everything, unless you’re in a town where that’s normal, they’re going to have a hard time finding good comps,” she says.

There can be exceptions, however. John Bredemeyer, a residential appraiser in Omaha, Neb., recently “approved” an $800,000 addition in an expensive neighborhood after confirming that the clients owned a strong local business and planned to be there for many years. “I said that in today’s market, they couldn’t turn around and get their money back. But if you have a five- or 10-year threshold, go ahead and do it.”

What do appraisers almost always like? “Low-cost improvements will typically recoup the cost,” Cote says. “Kitchens and baths always beat everything, but something not talked about too often is fixing a home’s functional value.” In many cases, this is as basic as reconfiguring existing space to bring a home up to par with its neighbors or its appraisal submarket.

An example is home offices, which ranked among the lowest of all projects in the Cost vs. Value survey. “In our market, three-bedroom homes trump two-bedrooms,” Cote says. “Someone had a one-bedroom home with an office with no doors and a dining room. You don’t need that; you need three bedrooms!” Noting that every market is different, she adds that she sees poor paybacks on elaborately landscaped yards, in-ground pools, and refinished non-walk-out basements (the adjusted value is just $5 to $10 per square foot in her market).

Bredemeyer agrees with the value of minor changes that will bring a “deficient” property up to the neighborhood par. He also likes relatively minor “freshening up” jobs — e.g., re-faced cabinets, new flooring or counters. That may be why an entry door is the No.1-ranked Cost vs. Value project this year. “It doesn’t cost you much, but it’s a first-impression thing with potential buyers.”

“Appraisers are being incredibly cautious,” says Karen Frank, a real estate agent in Pittsburgh. Even in markets like hers, where neither home prices nor valuations have been very volatile, “we’re absolutely advising clients to be more careful about how they remodel, and to address small ‘quality’ items that will add value.”

Recently, for instance, she advised clients to forego a $200,000 addition in favor of making their existing space feel more luxurious, with features such as crown moldings and larger baseboards.

Similarly, attic bedrooms (the No.3-ranked project, nationally) make sense because “that space is already there,” Bredemeyer says. “You’ve got the roof and the joists, and you don’t have to build new walls. You can take advantage of costs that have already been spent.”

Appraisers agree that windows and siding tend to have reasonable paybacks in most markets. As for other energy and/or resource-efficient home improvements, however, some may still be too uncommon — and therefore not reflected in usable comps — to appraise near their cost. By promising to slash utility bills, that $30,000 geothermal heat pump may be a great investment for your client over the long term, “but as an appraiser, you have to be very objective and ask if the market is actually going to pay the cost,” Cote says.

“As appraisers, we really do nothing more than measure the market and how buyers will value that market,” Bredemeyer says.

What You Can Do

Ask more questions. If a client questions whether a remodeling investment will pay off, ask how long they plan to stay in the home, and what their real goal is. Have a frank conversation about the neighborhood and the likely payback period.

Be connected. “Form a relationship with a good Realtor and/or a good appraiser,” Cote says, and ask for their honest opinion on specific homes or neighborhoods. One remodeling company that does this is Myers Constructs, of Philadelphia. “We send clients to Realtors for valuation confirmation, to find out what their house ‘should have,’” says Diane Menke, vice president.

Encourage your clients to dig deeper. For a few hundred dollars, they can hire an appraiser to provide an opinion of the home’s value before and after the remodel. Amorin says that having a qualified appraiser — preferably one who has long been active in that neighborhood — is especially critical in volatile markets that have had many short sales and foreclosures. “If they’re going to seek a home equity loan or something, the bank will not use an appraisal that was purchased directly by the consumer,” he adds. “They may have to pay for two appraisals” — but that’s better than making a costly remodeling mistake.

As for the bank appraisal, you can’t specify a particular appraiser, nor can your clients, but your client “can tell the lender, ‘I really want a professional appraiser, someone who has more than the minimum qualifications,’” Amorin says. They should make this request to the loan officer when they submit the loan application.

Document and educate. “Change the perception of the community, and then they’ll be willing to pay the price,” Cote says, in response to the valuations of improvements that may not be well-understood. Knowledge is power, and if the market (or the homeowner) doesn’t know a home has passive solar, the market may not see the value. Document the work that you do, and give the client clear, detailed documentation that they can use when and if they decide to sell.

—Leah Thayer, senior editor, REMODELING.