6

I own a house and live in what is often pejoratively refereed to as "the hood" (14th most dangerous hood in America according to a recent study). I bought the house because it was cheap and I had just gotten out of college and didn't want to stretch myself; ten years later and the house needs some work.

The chimney needs to be repaired and I have estimates of about $2500. My other option is to add air conditioning to the house and in the process replace the furnace removing the need for the chimney. The air conditioning will cost about 8.5k to do. My first idea was to get the house appraised and see if any of the renovations made sense, but there I hesitate. In an area such as mine are valuations trust worthy since other factors will obviously play into a potential buyers mind, or is the process smart enough to take in such ethereal aspects of location.

Also given I live in an urban area, similar houses to mine 1 mile away are in a very trendy section of town and worth quite a bit more making me worry my valuation will be inflated.

  • Do you live there or rent it? How long do you plan to keep it? – MrChrister Apr 13 '11 at 21:58
  • I own. I have no plan on moving and I like the house and despite the problems like the area. That being said I'm in software and have had offers in other states so moving is always possible. – rerun Apr 14 '11 at 3:19
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Bad areas are tough to value as a owner-occupied property, because the business model for being a slumlord is to rent apartments in absentia, usually to tenants receiving goverment subsidies such as Section 8 vouchers. The vouchers are based on a prevailing rent, which are often on par with nice suburban apartment complexes due to how that "prevailing" rate is calculated. So the value of the house is really an annuity calculation. You figure out the potential rental cash flow and apply whatever your local market premium is.

The point is, doing an apples to apples comparison is going to be tough, and justifying the cost of repairs that aren't remediating health and safety issues probably won't be recoverable from a home valuation standpoint. A buyer would probably rip out your central air conditioner and sell it!

If I were in your shoes, I'd look at the time horizon that you think you're going to be there and amortize the cost over that period. Assuming your mortgage is small and you're staying for about 5 years, spending $10k costs you about $170 a month. Your reward is a modern A/C and heating system.

Compare that cost to the cost of moving and your desires and see if it's worth it to you.

  • So basined on this I should view my homes value in the light of potential rent. The house next to me rents for 635 and my mortgage is 300 which may be more lucrative then selling. – rerun Apr 14 '11 at 13:07
  • You got it. It may be worth more to a buyer if they can sub-divide and rent two $500/mo apartments. Or two $500/mo apartments and a $100/mo garage. I think the more important calculation is for you personally. If you make improvements that cost $170, your total is $370+taxes/insurance. What does a house/apartment with similar features in a "good" neighborhood cost? My guess is more :) – duffbeer703 Apr 15 '11 at 12:25
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Over the last ten years you have reaped the benefits of a good financial decision. (Presumably your low mortgage has freed up money for other financial priorities.) There would be no harm in making a clean break by selling as is.

On the other hand, the resale value would probably be rather low considering the condition and the neighborhood. I don't want to assume too much here, but if a potential buyer is interested in the house by virtue of not being able to afford a house in a better neighborhood or better condition, their finances and credit history may make it difficult for them to be approved for a mortgage. That would reduce the potential buyer pool and further reduce the sale price.

If you can pull more in rent than the mortgage, you definitely have an opportunity to come ahead. Maybe window A/C units and a repaired chimney are enough if you're renting. Your rental income would pay for that in less than a year even while paying your mortgage for you. (Of course you don't want to become a sleazy slumlord either.)

1

I wouldn't personally spend any money on an appraisal. Spend some time yourself looking at Zillow.com and maybe Realtor.com and other sites to review recent sales in your specific area. Not the houses a mile away. Try to find comparables to yours. The key factor is dollars per square foot. See if the trend over the last couple of years is upwards or downwards in dollars per square foot of living area. If it's downwards, I wouldn't invest for sure.

  • I would be careful though, Zillow tends to inflate prices. – Kevin Apr 14 '11 at 19:08
  • good point - I'm haven't really evaluated Zillow for absolute value, but rather more for trend analysis. – Knox Apr 14 '11 at 20:07

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