How To Make Home Renovations Pay Off
I received a call this week from a person who wanted to know how they could make sure that they could get back the money they were going to invest in their house. The short answer is that you can’t be sure.
There is no guarantee that the money you spend on home improvements will be recouped when you sell your home. There are too many variable factors such as the cost of the improvements, what type of improvements you make, where the property is located, and how the real estate market is when you sell your home.
There are some things, however, that homeowners can do proactively to increase the chances that the improvements they do make to their home will get the most value possible. Today we’re going to discuss things to consider when making home renovations.
Points to Consider
Cost – What is the bottom line cost of the home renovation? Cost is very important because what you are trying to maximize is the difference between what the renovation will cost and the value the market will recognize.
Controlling cost is probably the most important thing you can do in affecting the outcome. You can control material costs by deciding what type and quality of finishes you want.
While material costs are somewhat fixed there are some variations in the labor cost due to who you get to do the remodeling. Some remodelers are more expensive than others, however, the quality of their work may or may not warrant the higher cost.
By seeking out referrals and reading reviews you can increase your chances of getting a competent contractor at a price that can maximize the return on the home renovations.
What is common in the market – By learning what is common in the market you can maximize what people are willing to pay. If you use designs, materials, and colors that are popular then it will be appealing to a greater number of people.
By making your home renovations appealing to a larger number of home buyers your pool of potential buyers will be greater. The economic theory of supply and demand will kick in because a greater number of buyers (demand) will be vying for your home (supply) and this will help increase the value.
Are the improvements important to me or everyone? – One thing to consider when making improvements is whether they are something
that is just important to you or the majority of home buyers. This is tied directly with the point I made above.
If you make changes to your home that only you care about then you are not appealing to the desires and demands of the market. This is perfectly fine but you should understand the possible outcome so you are not surprised when you sell your home and find out that your $100,000 renovations only increased the value of your home by $50,000.
I see this a lot in landscaping. It is easy to spend a lot of money on landscaping features that you love but some of them do not mean much to the majority of buyers and they will not pay dollar for dollar for what it costs.
What are the limits in value for the area? – It’s important to know the upper end of the price range of homes in your neighborhood. This will help you avoid overpricing your home for the area.
You never want to invest more in your home than you can sell it for. If the upper limit of price in your neighborhood is $500,00 you don’t want to spend $100,000 in improvements on a $450,000 home.
You will need to consider what alternatives buyers would have if they wanted to spend $550,000. Would they get a better return on their investment by spending $550,000 on a home that is overpriced for the neighborhood or another neighborhood that has an upper limit of $600,000 or more?
The principle of progression states that lower-priced homes in a neighborhood will increase when they are surrounded by more expensive homes. There is also the principle of regression that states that the most expensive home in the neighborhood will decrease in value when surrounded by less expensive homes.
You never want to have the most expensive home in the neighborhood and this should be taken into consideration when planning home renovations.
Cost vs contributory value – The bottom line in this whole discussion is that of cost vs contributory value. The cost, of course, is what you have to pay for the renovation, which includes materials and labor. The contributory value is the value the improvement contributes to the overall value of the property.
Swimming pools are always the best example to use to explain this concept. The cost of a swimming pool can vary, depending on what type of pool and features that you have.
Most pools rarely contribute more value than they cost but if you go into the situation knowing this then you will not be surprised. Many improvements do not contribute more value than the cost, however, they do add value to the happiness of your life because there are non-tangible benefits that cannot be measured monitarily.
No rule of thumb – Lastly I would like to add that there is no rule of thumb to use when considering home renovations because, as I stated above, there are various factors that influence value. One way to determine the impact of renovations is get a “subject to” appraisal that will estimate the value of your home after the renovations are made. If you can live with the estimate after taking into consideration the costs then you will be able to make an informed decision as to whether you want to proceed with the project.
Questions?
I hope this discussion of things to consider when making home renovation gives you some clarity. If you have any additonal questions feel free to contact me and as always thanks for reading.
I find very few items actually give an immediate 100% return on investment. It’s just harder to achieve that then we think. I agree with you though it’s very important to talk with the local market (appraisers and agents) when doing improvements. I consulted with a friend about a house he inherited and after walking through the property and talking about various issues I told him, “Stop what you’re doing and be sure to hire an agent immediately before any more upgrades.” I didn’t discuss value with my friend because I wasn’t there for that, but I gave him lots of advice. My sense was he needed to discuss the list price with the agent immediately though before doing the wrong improvements or dumping in money into the wrong places.
I’m afraid the HGTV type shows have given some unrealistic expectations on the return on investment of home renovations. That’s great that you could help out your friends and provide some helpful advice and point them in the right direction.
I would go so far as to say that very few renovations will give you all your money back, forget about more than it cost. The exception being if the carpet is worn and dirty and the walls need painted and the light fixtures are ugly and or outdated then those are worth doing and probably will give you back more than it cost.
I appraised the same house twice in 18 months. They spent $40,000 remodeling what was already a pretty nice master bathroom. Maybe they get $5,000 more.
With all of the HGTV shows that show a greater return on every renovation made, the general public has been misinformed. It’s sad to think that after spending $40,000 renovating their home that they will only realize a $5,000 increase in value. While many homeowners would still make the renovations they should at least be aware that they are not getting a dollar for dollar return on their investment.
Or just take some Turtle Wax, shine up your AC coil & tell the appraiser it’s new!
I’ve never heard of that trick before, Andy, but I’ll be on the lookout for it!