Remodeling: It’s all about timing
By Dian Hymer
Inman News

October 1, 2006

Many people think that fixing up a house is a sure way to make money when they sell. Yet, homeowners are often disappointed when they find that their renovations don’t add as much to the value of their home as they cost.

There are several factors that determine whether a remodeling project will be profitable. One is where you are. For example, it costs less in the Midwest than in the West to replace windows with high-end dual-pane ones. But the homeowner who lives in the West is likely to recoup more than 100% of that investment, while the Midwesterner will probably only recoup about 84%, according to the annual 2005 Cost vs. Value Report published each year by the National Assn. of Realtors in conjunction with Remodeling Magazine.

Another variable is the rate of appreciation, which also varies over time and from place to place. Generally, the last five years were a good time to remodel. For example, if you bought a fixer-upper in the San Francisco Bay Area in 2000 and enhanced it with cost-effective improvements, you probably realized a healthy profit if you sold in 2005.

Let’s say you pay $300,000 for a fixer. According to the Cost vs. Value Report, improving curb appeal — such as adding new siding and windows — and kitchen and bathroom projects consistently have been high-return investments in most markets. So you concentrate your efforts on these high-performing improvements and spend $50,000 sprucing up the property. After the renovations, the house has “cost” $350,000. The market appreciates at a rapid clip — let’s say 10% per year from 2000 until 2005. 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 living there, you received an added bonus of more than $80,000 in appreciation on a more valuable asset. This assumes that the appreciation rate is constant across 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 soon. Depending on where you live, you might only recoup 70% to 90% of the money you invested on renovations at the time of sale if you don’t stay long enough to benefit from appreciation.

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 over-improving your home for the neighborhood — a mistake made by many homeowners who remodel.