Over/Under Improving the Property

Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Danny: Hi, this is Danny Regalado, and I’ll be your host for this REI Classroom. Today we’re going to be talking about over- and under-improving properties.
Mike: This show was sponsored by passiverental.com.
Danny: One of the largest problems that investors have is not to over-improve a property. One of the main reasons that you don’t want to over-improve the property is you may not see the profit that you thought you were going to have if you don’t properly analyze the market. Certain markets won’t support certain upgrades, so it’s very important to really analyze your market and understand what are the components that buyers are looking for and what are the components that buyers just won’t pay extra for.
The level of improvements that you make to your subject will have an impact on your appraisal. Appraisals are based on condition ratings and quality ratings. For example, if you do a rehab where you’re replacing flooring, kitchen, bathrooms, paint, and maybe some landscaping, your condition rating won’t be as high as if you go in there and do those things but also do windows, electric, HVAC, roof. There’s a very big distinction between a complete rehab and a partial rehab, and those will have impacts on your appraisal report.
Another thing that will have an impact on your appraisal report is the quality of the finishes. It’s very important to keep in mind the market when determining the quality of finishes. The quality of finishes could range from standard qualities where you have the ceramic tile, the laminate flooring, the thermofoil kitchen cabinets, versus hardwood, marble, travertine, kitchens with granite, stainless steel appliances, crown moldings. All these different aspects will impact your appraisal and the accuracy of your appraisal, so it’s very important to really understand your market and know what your buyers will expect when they go into the property.
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