Monday, April 21, 2008

Remodeling - Cost and Value

Lately many of my clients have been thinking about taking on small home projects, updates, and general remodeling. Most of them ask me if the project will increase the value of their home - whether they be homeowners considering marketing their home for sale, or be they home shoppers wondering if they should purchase and improve.

The answer - yes, home improvement will increase the value of your home. But the real question is, by how much?

Home improvement projects generally will not return the full amount of your investment, but will improve the marketability of your home. If you spend $20,000 on your bathroom, for example, you may only increase the value of your home by $12,000 - $15,000, depending on the project. If the project addresses real concerns - aesthetic or functional - that investment may garner a $12,000 return, but may also sell your home two months earlier, saving you a couple mortgage payments and the stress that comes with having your home on display seven days a week for months at a time.

To determine what a project will return requires a bit of artful estimation and a little science in the form of general statistics. Every year Remodeling Magazine releases their Cost vs Value Report. This is a must read if you're contemplating improving your home. The basic data can be downloaded for a region or major city by completing their form here.

You should consider a home project - remodel or addition - under the following circumstances:
  1. You are looking to market your home now or in the near future and a particular room's limitations or condition will turn off prospective buyers, making it difficult to sell your home. This is especially true if you are in a hurry to sell.

  2. The improvement is required to sell your home. In some cases, building code requires that something be improved in order to simply meet the local code. Some localities in Chicago's western suburbs, for example, require a city or village inspection before a home can be conveyed. In these instances, it may be required that you improve a home system (like a furnace or garbage disposal) in order for the transaction to take place. Another example would be the improvement of a deck or porch to meet city code. Chicago substantially upped the requirements for attached decks in 2004. If your deck isn't up to code, many inspectors will point this out to home buyers. If the city makes the discovery, they will condemn the porch immediately, requiring the homeowner or condo association to take (expensive) action.

  3. You will get enjoyment out of the home improvement, and aren't necessarily looking to recoup the full investment. That is to say, if you are moving into a new home, or you are not planning to sell your home in the immediate future, and the improvement is something you can enjoy for some time before moving again.
The projects with the greatest return on investment are exterior ones, like replacing siding or adding a deck. If you are a single-family homeowner, these may be worth improving. On average, the full cost of siding replacement is recouped in the home sale. If you're a condo owner, I don't recommend improving the exterior of the building out of your own pocket! However, the Association may want to consider these improvements.

Interior to your home, the kitchen and bath have the greatest potential of increased value, while the home office has the least. According to the report, a major kitchen remodel can recoup approximately 80-90% of your investment. Interestingly, a mid-range kitchen remodel recoups more of its cost than a high-end remodel. This certainly has to do with material costs.

Keep in mind, however, that if your market competition has high-end kitchen finishes, you may not want to do a mid-range improvement. You may expect a higher rate of return, but your neighbors with gorgeous kitchens will increase expectations for your prospective buyers, and they will count your new kitchen as a negative, not a positive.

Home office remodels should be done only if the homeowner needs it for his/her own function, or if it is an obvious and significant detriment to selling the home. These projects tend to return less than 60% of the money invested.

Cost versus Value citation: “© 2007 Hanley Wood, LLC. Reproduced by permission. Complete city data from the Remodeling 2007 Cost vs. Value Report can be downloaded for free at”