Sometimes a $20,000 expense will buy you $35,000 of equity. Several years ago, one of my customers received an appraisal on their 2,400 square foot two-story that was $35,000 lower than they were paying us. I was quite surprised by this because most of my customers receive appraisals considerably higher than their cost. I obtained permission from the lender, a local bank that I knew well, to speak directly to the appraiser. What I learned was that she did not know that the house contained hardwood floors and a gas fireplace; I couldn’t tell whether the bank hadn’t told her or she missed the information in her review of the construction contracts. But this only accounted for $15,000 of the appraisal shortfall. The real problem, as the appraiser saw it, was that all of the other comparable homes she had looked had a two-car garage, unlike my customers’ home. My customers had decided to postpone building the garage for two years. The appraiser explained that the absence of a garage reduced the appraisal value of the house by $35,000. Even when I told her that I could build it for $20,000, she held fast to her assessment.

When my customers went back to the bank with this information, the bank qualified them for an additional $20,000 on their mortgage so they could build the garage while their house was being finished. Since the appraisal went up by $50,000 – $15,000 for the wood floors and fireplace and $35,000 for the garage, the loan was approved. I learned two things from this experience. First, appraisers aren’t always aware of all of the upgrades a customer has selected. Whenever I hear of a low appraisal, it’s the first thing I ask about. Secondly, appraisal value is very different from cost. Sometimes, as in this case, spending some additional money can add a lot of appraised value, while at other times, omitting a relatively expensive item can greatly reduce the cost without significantly reducing the value.

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