Many people think that fixing a house is a sure way to make money. Yet, homeowners are often disappointed when they discover that their renovations didn’t add as much to the market value of their home as they thought they would.
There are several factors that determine whether a remodeling project will be profitable. One is that renovation costs and the market value of those renovations vary from one part of the country to the next.
For example, it costs less to replace windows with new, high-end, dual pane windows in the Midwest than it does in the West. But, the homeowner who lives in the West is likely to recoup more than 100 percent of what he invested, while the Midwesterner will probably recoup only about 84 percent, according to the annual 2005 Cost Versus Value Report published each year by the National Association of Realtors in conjunction with Remodeling Magazine.
Another variable is the current rate of appreciation, which also varies over time and from place to place. Generally, the past five years was a good time to remodel. For example, if you had bought a fixer-upper in the San Francisco Bay Area in 2000 and enhanced it with cost-effective improvements, you probably would have realized a healthy profit when you sold in 2005.
Let’s say you pay $300,000 for the fixer. According to the Cost Versus Value Report, improving curb appeal (such as adding new siding and windows) and kitchen and bathroom projects have been consistent high-return investments in most markets. So you concentrate your efforts on these high-performing improvements and invest $50,000 in the property.
After the renovations, the house is worth about $350,000. The market appreciates at a rapid clip — let’s say 10 percent per year from 2000 until 2005. So, your property is now worth $563,678. If you had not done the renovations, your property would only be worth $483,153, or $80,525 less.
By making the improvements, you not only enhanced your enjoyment of the property while you lived there, you received an added bonus of more than $80,000 because you received appreciation on a more valuable asset. This assumes that the appreciation rate is constant across different price ranges.
Now that the resale housing market is slowing, does it still make sense to invest in home improvements? Not if you live in an area where the appreciation rate is waning and you’re planning on moving again soon. Depending on where you live, you might only recoup 70 percent to 90 percent of the money you invested on renovations at the time of sale if you don’t stay long enough to benefit from appreciation.
HOUSE HUNTING TIP: Before embarking on a large renovation, consider whether it makes more sense financially to move to a house that better suits your needs. In a runaway seller’s market, it’s difficult for many homeowners to find a suitable home to buy due to low inventory. And, even if you find a home, there’s no guarantee that you’ll be successful in buying it due to competition from other buyers.
Now inventories are rising in most areas of the country, making it easier to find a house to buy. In some markets, homeowners whose listings have been on the market for a while might be receptive to offers made contingent on the sale of the buyers’ home. This rarely happened last year in tight inventory areas.
THE CLOSING: If you buy a new home rather than remodel your existing home, you won’t have to live through the construction nightmare. There’s also no need to worry about overimproving your home for the neighborhood — a mistake made by many homeowners who remodel.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.