Most homeowners will sooner or later give serious thought to remodeling. Recently, a homeowner contemplated doing a costly renovation to a small, two-bedroom home. The major expense was the kitchen, which was only marginally functional. For more space, walls had to be knocked out. The engineering that was required to do this ran the cost of the kitchen up to $100,000. Does it make sense to make such costly renovations if you don’t increase the square footage of the house in the process?
Before you can make a decision, you need to know the approximate current value of your home. The easiest way to get this information is to call your real estate agent and ask for a current market evaluation of your property. One quick phone call to your agent may be all it takes to decide whether or not to proceed with your plans.
For instance, one Oakland, Calif., homeowner paid $350,000 for his home six years ago. Without doing anything to the house, it would probably fetch $600,000 in the current market. If he were to proceed with the renovations at a cost of $150,000, he’d have $500,000 invested in the property–well below the current market value of the home in its present condition. The property will no doubt be worth quite a bit more after it’s remodeled.
A general rule-of-thumb for remodeling is to make sure that you don’t over-improve your home for the neighborhood. If the renovation tab in the above example were to escalate to $300,000, you could risk over-improving for the neighborhood. It’s not a good idea, from an investment standpoint, to improve your home to the point that it’s the best house on the block. Market price is held back somewhat by the lower-priced homes on the block.
Your real estate agent can help you to determine if you will be over-improving for the neighborhood. Ask for comparable sales information for listings in the neighborhood that you foresee will be similar to your home after it’s remodeled. If the comparables sold for less than the amount of the current value of your home plus the cost of the renovation, you may be spending too much on the remodel.
HOME SELLER TIP: Keep in mind that you usually don’t recoup 100 percent on a major renovation if you sell immediately after the work is done. Just as it’s risky to buy a home if you plan on moving again soon, it’s also better to postpone a major remodel if you’re personal life or financial situation is uncertain.
The disruption of remodeling can be murderous on relationships. If the construction will take the kitchen and baths out of commission, consider moving to an interim rental for the duration. The cost of maintaining two homes should be factored into your budget.
Before embarking on a big remodeling project, find out what kind of home you can buy for the same investment. You may find that for the same amount you plan to invest in remodeling, you can buy a larger, more comfortable home that will provide more appreciation potential in the long run.
For instance, let’s say you own a two-bedroom home that’s worth $600,000. If you invest $100,000 in a kitchen remodel, you’ll still only have a two-bedroom house. If you can find a suitable three-bedroom replacement home for $700,000, you might be better off selling your home and buying the larger one.
THE CLOSING: Don’t forget to take resale value into account when you remodel. It’s important to please yourself. But, from an investment standpoint, you should make sure that potential buyers will also think your improvements add value.
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.
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