What Lenders Look for in a Renovation Appraisal

This kitchen renovation, for so long just a gleam in my iPad, is becoming a reality, and that's exciting. I'll be paying for a good deal of it out of pocket, but I'll need to borrow additional funds. Let's take a look at the number-one thing a lender looks for to approve renovation financing: Will the current value of the home support the current mortgage loan amount plus the renovation amount you want to borrow.

First up: Comparable homes that just sold.

For anyone living in the New York City area, the website Streeteasy shows members (sign up is free) not only what's for sale in a particular neighborhood, but what recent homes actually sold for. 

A search for 2BR + 1 Bath comps in my neighborhood turned up quite a range:

Via Streeteasy

Comps tell us the value of our home right now is in the $550k to $650k range. That's quite a range for homes roughly the same 1,100 sq ft size. It's time to think like an appraiser. (Hint: We're not necessarily looking for the most expensive or the one with the most recent and best quality renovation.)

Say two homes are identical, except that one has had an upscale kitchen renovation done at a cost of $65,000. The appraiser may look at the work done there and think a similar level kitchen remodel could be done that only cost $40,000. Because a typical buyer may simply purchase the unrenovated home and renovate the kitchen themselves, saving $25,000, the appraiser determines that the first seller won't be able to recoup their full $65,000 were they to sell. This is what appraisers call "the principle of substitution."

Of course appraisers do also consider that many buyers won't want to deal with the hassle of doing a renovation themselves. Other things they consider are square footage, number of rooms, location and upgrades to systems, and changes that conserve energy. In addition, in New York City, they take into consideration proximity to the subway, the local charm of our historic district, and building amenities such as doormen, fitness room, and parking.

Of the comps on this list, I circled one that has a floor plan and layout almost identical to ours. 

Comp floorplan, via Streeteasy

Both have a similar-size galley kitchen and adjacent dining area on a raised platform right off the living room.

Via Streeteasy

Both have a large foyer that can be repurposed as a dining room.

Via Streeteasy

And both have a bathroom with a tub and a separate shower, as well as bedrooms of a similar size.

Via Streeteasy

Plus, both homes are located in the Jackson Heights historic district.

Jackson Heights Gardens

The comparable home gets extra points, because it has a lower monthly maintenance and is located very near an express train station, while our home is near a local subway station (slower, making more stops). But the comp also has a very dated kitchen and bath, which look like they were last touched sometime in the 70s. The two co-ops have very similar building amenities, but ours has doormen and indoor parking (and this last is a rare find in a neighborhood where parking is a bit of a nightmare).

This comp is almost a perfect comp for our particular exercise, exactly because it has not been renovated in decades. As in our example above, this home may have just been purchased by a thrifty buyer willing to do her own renovation. And I am completely comfortable with the price she was willing to pay. Because we bought our home at less than half the price of this comp, whatever our appraiser comes up with as the value of our upcoming renovation, we have enough equity in our home to get an appraisal that supports our mortgage plus the cost of my dream renovation. It looks by all accounts like this renovation is a go.

This kitchen renovation, for so long just a gleam in my iPad, is becoming a reality, and that's exciting. I'll be paying for a good deal of it out of pocket, but I'll need to borrow additional funds. Let's take a look at the number-one thing a lender looks for to approve renovation financing: Will the current value of the home support the current mortgage loan amount plus the renovation amount you want to borrow.

First up: Comparable homes that just sold.

For anyone living in the New York City area, the website Streeteasy shows members (sign up is free) not only what's for sale in a particular neighborhood, but what recent homes actually sold for. 

A search for 2BR + 1 Bath comps in my neighborhood turned up quite a range:

Via Streeteasy

Comps tell us the value of our home right now is in the $550k to $650k range. That's quite a range for homes roughly the same 1,100 sq ft size. It's time to think like an appraiser. (Hint: We're not necessarily looking for the most expensive or the one with the most recent and best quality renovation.)

Say two homes are identical, except that one has had an upscale kitchen renovation done at a cost of $65,000. The appraiser may look at the work done there and think a similar level kitchen remodel could be done that only cost $40,000. Because a typical buyer may simply purchase the unrenovated home and renovate the kitchen themselves, saving $25,000, the appraiser determines that the first seller won't be able to recoup their full $65,000 were they to sell. This is what appraisers call "the principle of substitution."

Of course appraisers do also consider that many buyers won't want to deal with the hassle of doing a renovation themselves. Other things they consider are square footage, number of rooms, location and upgrades to systems, and changes that conserve energy. In addition, in New York City, they take into consideration proximity to the subway, the local charm of our historic district, and building amenities such as doormen, fitness room, and parking.

Of the comps on this list, I circled one that has a floor plan and layout almost identical to ours. 

Comp floorplan, via Streeteasy

Both have a similar-size galley kitchen and adjacent dining area on a raised platform right off the living room.

Via Streeteasy

Both have a large foyer that can be repurposed as a dining room.

Via Streeteasy

And both have a bathroom with a tub and a separate shower, as well as bedrooms of a similar size.

Via Streeteasy

Plus, both homes are located in the Jackson Heights historic district.

Jackson Heights Gardens

The comparable home gets extra points, because it has a lower monthly maintenance and is located very near an express train station, while our home is near a local subway station (slower, making more stops). But the comp also has a very dated kitchen and bath, which look like they were last touched sometime in the 70s. The two co-ops have very similar building amenities, but ours has doormen and indoor parking (and this last is a rare find in a neighborhood where parking is a bit of a nightmare).

This comp is almost a perfect comp for our particular exercise, exactly because it has not been renovated in decades. As in our example above, this home may have just been purchased by a thrifty buyer willing to do her own renovation. And I am completely comfortable with the price she was willing to pay. Because we bought our home at less than half the price of this comp, whatever our appraiser comes up with as the value of our upcoming renovation, we have enough equity in our home to get an appraisal that supports our mortgage plus the cost of my dream renovation. It looks by all accounts like this renovation is a go.