Every year, the National Association of Realtors in conjunction with Remodeling Magazine publishes a list of various home improvements and the percentage of value they add. Every year it becomes increasingly frustrating to see NAR roll out the same nonsense with local and major media, not to mention real estate professionals quoting it like mindless automatons. Although the NAR survey has thousands of respondents comprised of appraisers, agents and brokers, with methods that give the appearance of being scientific, the results are unreliable and inconsistent. It’s not that they are trying to be misleading. It’s just that everyone is looking for a “ballpark” figure or a “rule of thumb” and they simply don’t exist. For instance, the survey suggests that a basic bathroom remodel in Baltimore supposedly yielded a 70 percent return on cost, in Philadelphia the same project would only garner a 60 percent return, and in Detroit you could expect 46 percent. The survey is riddled with similar wacky results leading any critically thinking person to question their reliability.
Perhaps the most common questions homeowners have before committing to a major renovation or remodeling job are: “What can I do to increase the value of my house? Will this project increase the value of my house? “Should I do this project?” Unfortunately, the NAR survey serves to confuse and perpetuate the same myths about remodeling every single year. The true answer to the aforementioned questions is simply, “It depends.” Everyone is looking for a one-size-fits-all answer, but it really comes down to each individual’s situation. One’s decision to remodel depends on location, market segment, current property condition, and timing.
There are many projects that will increase the value of your home. Unfortunately, there are few things you can do to your house that will increase the value greater than the cost. If needed, fresh paint, new carpet and general clean up almost always give the greatest return relative to the cost of doing the project. However, what about a room addition, a new kitchen/bath, finished basement, or deck/patio? Once again, it depends.
Suppose you are considering a major renovation or addition. You need to answer some questions. What does the market expect from a house in this particular neighborhood or market area? Is it in an area where buyers expect high quality materials or does the area require something a little less ostentatious? If you are a real estate agent, you need to know buyer expectations. A first time home buyer will be less demanding than a move up buyer or the dream home buyer.
You also have to consider the current condition of the existing improvements. Your old kitchen may be a little dated, but does it still function? If it still has some remaining economic value, renovation may be premature. An extreme example will help make the point. Suppose you have a new house and you immediately “gut” the kitchen and install a brand new $40,000 kitchen. Would the value of your house increase by $40,000? Clearly, the value would not increase because the original kitchen met current standards and had not physically or functionally depreciated. Now, if the kitchen was 30 years old and did not meet market expectations and it has fully depreciated, a new kitchen is warranted. The tougher question comes when the kitchen is between 15 and 20 years old. At this point you have to consider how long you plan on staying in the home.
Your time horizon is an important part of the decision making process. Are you the type who gets transferred every couple of years? If you move on a regular basis because of your career, you have to be circumspect before committing to major renovations. Investing tens of thousands of dollars in a possible over-improvement and then immediately having to sell would be a big mistake. Rapid appreciation such as we experienced over the past few years when values were rising 15 to 20 percent annually can usually erase any mistake, but if you are in a declining market (like what we are in presently) you need to be more prudent. If you plan on staying for a long time (at least five to ten years), your decision is much easier.
Simply put, within reason, do what you want. Remember that real estate is just as much shelter as it is an investment. You should enjoy your home, but don’t be foolish either.
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