After doing some major renovations on my home, I wanted to determine our return on investment, how much more we could do before our property became over-improved, and if it was worth exploring refinancing. So I turned to my oh-so-generous Realtor, Garrett Ackles of Semonin in Louisville, Kentucky, for a rough estimate before we went for an official estimate. Generally, when you receive an assessment, it comes with pages of hard-to-sift through real estate jargon. So imagine my surprise when Ackles gave me a straightforward number and an explanation almost anyone could understand.
While many real estate professionals appraise in terms of “dollars per square feet,” Ackles preferred—at least in my case and our area—to rate properties on a one to five-star scale. Basically, he looks at the properties in the neighborhood, sees what they’re going for and creates five different brackets: Properties that are almost unlivable are the “one star” properties, and the top-of-the line, dream home properties are the “five star” properties, with the median house price in the area as the “three-star” properties.
“Looking at it this way, I can easily identify the type of buyer and the price range they would likely pay for the property,” Ackles tells me. “We can then assign a reasonable price per square foot range for each of the ‘star’ categories in the micro-area.” He also said that this method allows him to better control for variances.
He told me that when we first purchased our property, he would have classified it as a low two-star: It had potential, it was livable, but it was in desperate need of updates. We paid $200,000 for it, or approximately $50 per square foot. Then, when we did initial general updates (like installing central air, tons of cosmetic updates, and a gut job reno of the awful third floor), he said we jumped into a solid mid-to-high three-star home, bumping up our estimates to $85 a square foot to $95 a square foot.
And he was right! When we had an official appraisal, our home was valued at $350,000 after our initial updates.
So we did more renovations—updating our kitchen, pantry, and bath (which Ackles told us would be visually and functionally appreciated by a higher end buyer.) He told us these renos moved us into a high three to low four-star category. Based on comparable properties in the area, that brought us up to $110 to $115 per square foot, or between $429,000 and $448,000.
We decided it was worth refinancing and got an official appraisal. Turns out, he was right again—albeit a little conservative—and our home was worth $475,000.
We’re still planning some some minor updates to further enhance our rating, but Ackles told us our house will really only be able to get into the middle four-star rating, or about $125 per square foot, since that’s the maximum value potential of our property, due to its location and general functionality. Though we could add every upgrade to our property, there is only so much return on investment we will get for it.
“Just like the buyer who wouldn’t pay ‘five-star’ money for a hotel that is a half mile from the beach, I don’t think there is anything you could do—or any amount of money that you could spend—to make this a five-star location,”Ackles said.
Yes, Ackles’ method is unconventional, but the approach behind it is common for real estate agents. While Einat Bar, a real estate agent with Compass in Brooklyn, New York, says that she’s never done a star rating, she and her colleagues generally do rate properties for condition and location on a scale with comparable properties on the market and recent sales. However, not all agents do this. Bar notes that some agents in New York City stick strictly to price per square foot appraisals.
This is all to say that you definitely shouldn’t skip an official appraisal if you’re looking to sell sometime soon or refinance—but I think Ackles’ trick has helped me immensely when I’m trying to gauge what renovations are worth undertaking and how much they’ll add to my home’s resale value.