How improvements and permits affect home value

Cost is not value

An appraiser, and a careful CMA, ask how much buyers pay for a feature, measured by comparing sales of homes with and without it. A kitchen or bath that brings a home up to the standard of nearby sales tends to show up in price. Finishes or an addition well beyond what similar homes on the street offer often do not, because buyers comparing homes in that price range will not pay for them.

National averages of renovation payback do not tell you what buyers on your street will pay, so we do not quote them. For a project you are planning, ask for recent local sales of homes with and without similar work, and compare their prices, not the contractor’s estimate.

Permits and unpermitted work

In Boston, Inspectional Services issues short-form and long-form building permits depending on the scope of work, and past permit records for an address can be searched. Other cities and towns run their own building departments.

Fannie Mae’s appraisal rules address additions made without required permits: the appraiser must comment on the quality and appearance of the work and its effect on value. Beyond the appraisal, missing permits raise questions for the buyer’s inspector, attorney and insurer about safety and about how the space can be used.

Sellers should gather permits and final inspections before listing. If something was done without a permit, talk with a contractor and your attorney about legalizing it before a buyer finds it. Buyers should compare the listing with the permit history and ask for documentation during the inspection period. Our renovation and permits guide covers the Boston process.

Systems and deferred maintenance

The roof, heating and cooling equipment, electrical service, plumbing and water heater account for much of a home’s condition rating. On Fannie Mae’s scale, C3 is a well-maintained home in its first cycle of replacing short-lived components; C4 has minor deferred maintenance and normal wear; C5 has obvious deferred maintenance and needs some significant repairs.

C6 means substantial damage or deferred maintenance that affects safety, soundness or structural integrity. Fannie Mae will not buy a loan on a C6 property as is: the appraisal must be made subject to repairs that bring it to at least C5. Buyers using those loans then need the work done before closing, which narrows the field. Minor deferred maintenance is noted in an appraisal but is not a required repair.

Effective age matters more than the year built. A 1920s house with a recent roof, heating system and electrical service can rate better than a newer house that has been neglected.

Finished basements, attics and ADUs

Under the ANSI measuring standard Fannie Mae uses for houses, a level that is partly below grade is below-grade area, even if it is finished or opens onto the yard. It is reported and adjusted separately from above-grade living area, and compared with other finished basements in the sales rather than priced as main-floor space. Ceiling height, light, dampness and permits all affect what buyers will pay for it.

An accessory dwelling unit is reported separately in the appraisal. Whether the property is treated as a one-unit home with an ADU or as a two- to four-unit property depends on factors such as separate utility meters, a separate postal address, and whether the unit can legally be rented. Our ADU guide explains the state’s by-right rules: a qualifying ADU does not need a special zoning permit, but it still needs a building permit and must meet the applicable requirements.

Energy upgrades and solar

Fannie Mae asks appraisers to compare energy-efficient features with comparable sales, and does not allow a dollar-for-dollar adjustment based on cost or projected savings. Heat pumps, insulation and new windows help most when buyers can see them in lower bills and in the sale prices of similar homes.

Solar panels that are leased, or supplied under a power purchase agreement, belong to a third party. They are treated as personal property and excluded from the appraised value. If you have leased panels, read the transfer terms and ask the solar company how a sale works before you list, because the buyer will have to deal with that agreement.

Before you renovate or list

A short checklist that applies whether you are improving a home to live in or preparing it for sale.

• Fix safety, water and heating problems first; they drive the condition rating and every buyer’s inspection.
• Look at recent local sales before choosing finish levels.
• Pull permits, and close them out with final inspections.
• Keep receipts, warranties and dates in one folder to share with buyers and the appraiser.
• If time is short before listing, finish small repairs well rather than starting a large project.