So you and your family have seen the residence you want to become old in. The view is good, the people are great, and the price tag was perfect. Now as with many home owners in this situation you start doing minor renovations to your residence. A little paint on the walls, maybe some wallpaper, new carpet in this room, corian in that room, a ceiling fan here a fixture there. Finally you are pleased with your newly improved residence.

Time passes you by and you decide you wish to refi for some reason. Now pretend you realized you could receive a much better interest rate.You begin to tell your lender about all the upgrades in your residence and how great it looks, etc. etc. Your lender then tells you about how much equity you must have in your home and as a result of your great loan to value ratio they might let you cash-out some of that equity. No matter whether you attempt to cash-out equity, your issue shows up when the lender tries to get an appraisal. The real estate appraiser shows up and looks over your residence and goes back to the office to write up his report. After reviewing the data he realizes there is a problem, 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 basically means is that the renovations you have done to your residence are much higher than the houses in your neighborhood so now you are faced with diminishing returns. None of the homes in your area have sold near as much to what your residence SHOULD be sold for and lacking appropriate comparable sales data proof of your home’s value is impossible. An appraiser is not going to be able to give a value to your residence any higher than the highest sale price in the area. This might not be terrible for some, but for investors looking to cash out or with low LTVs this might be a deal killer.

If this terribly concerns you then you may consider contracting an home appraiser or estate agent to provide you a consult. Select a person that is knowledgeable about your neighborhood because they will know more than anyone how much houses are being purchased for and what grade these houses are. Look through your neighborhood and look at the for signs in the front yards. If you begin to take note of a repeated realtor then that is a best bet for a contact. An home appraiser can go one step further and provide you a ”subject to” sales value based on the upgrades you are considering doing to your home. This will be incredibly helpful if you have bought a estate as an investment.

The moral of the story here is to always are aware of your market area which is usually defined as your immediate and surrounding neighborhoods up to one mile away. Know what homes are going for and the type of construction quality or amenities they have prior to starting big time renovations. If you must be Mr. and Mrs. Jones and over do it then be well aware of the law of diminishing returns.