O.K., you and your family come across the residence you would like to become old in. The lot is good, the people are amazing, and the price was just right. Now like the average home real estate investors in this situation you embark on doing minor alterations or upgrades to your residence. A little paint in a few rooms, maybe some wallpaper, new hard wood in this part of the house, silestone in that room, a ceiling fan here a fixture there. Finally you are satisfied with your newly renovated residence.

A year or so passes you by and you decide you would like to refinance for one reason or another. Now assume you decided you could receive a lower interest rate.You begin to tell your broker about all the renovations in your residence and how amazing it looks, blah blah blah. Your broker tells you about how much equity you have to have in your home and as a result of your amazing loan to value ratio they might be able to let you cash-out some amount of that home equity. Regardless of whether you attempt to cash-out equity, your problem shows up when the broker tries to get an house appraisal. The appraiser comes out and reviews your residence and goes back to the office to write his report. After reviewing the information he realizes there is a issue, your residence is huge . . . Much TOO great for your location.

Your property now becomes what appraisers would call “Functionally Obsolescent Due to Super Adequacy”. What this really means is that the renovations you have made to your residence are superior to the homes in your neighborhood so now you are faced with diminishing returns. None of the properties in your location have sold near as much to what your residence SHOULD be worth and without comparable documents proof of your home’s value is impossible. An appraiser will not be able to place a value to your residence any higher than the highest sale price in the location. This might not be terrible for some, but for people looking to cash out or with low LTVs this could very well be a deal killer.

If you are genuinely worried then you probably should consider contracting an home appraiser or real estate salesperson to provide you a consultation. Choose an individual that is knowledgeable about your area because they will know more than anyone how much houses are being sold for and what grade these houses are. Stroll your area and locate sale signs in the front of houses. If you start to notice a common name then that is your good choice for a contact. An home appraiser can go 1 step further and give you a future selling value based on the remodeling you are thinking of doing to your house. This can be incredibly helpful if you have purchased a house as an investment.

The lesson here is to be sure you are aware of your market area which is typically defined as your immediate neighborhoods up to 1 mile from your home. Be aware of what properties sale for and what type of construction quality or amenities they have prior to starting major renovations. If you must be Mr. and Mrs. Jones and do your own renovations, don’t be surprised when your home falls victim to the law of diminishing returns.

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