The Alvin Bynum house, circa 1875, photo date 1954
The BIG question
I just spent $100,000 on a new fancy kitchen, so why isn’t my home worth $100,000 more than it was yesterday? I get this question enough that I thought I would write a short blog. However, I come from a long line of Irish engineers and in our family nothing is worth talking about unless you talk about it too much, so here goes.
Why do you care if your home value increases? What if you will never leave your home? If this is the case then the only important consideration is what you can afford. Don’t worry about your home value, go enjoy your new kitchen for the next 20 years and please (I am serious, no sarcasm intended) send a photo.
But, what if you are a workin’ for a livin’ and have some money stashed away? You don’t think you’ll be moving anytime soon and would love to update your kitchen and bathrooms, but don’t want to throw good money after bad if you have to move. This blog might help you out a bit.
There’s a $50,000 gorilla in the room
Cash is really the BIG question, so here is a BIG answer. In most cases you will never get back all of the money you put into a remodel. Period. How do I know this? Because people with far more time on their hands than I have gathered tons of information on the subject (and if it weights a lot, it must be true.) Read the Cost Value Report by Remodelling.net According to these folks the average return on your remodel investment ranges fro 50% to 75%. So if you blow $50,000 on a new kitchen, plan on recouping $25,000 to $38,000 if you need to blow-this-pop-stand.
These costs include general contractor fees which run 10% to 30% in my area, and higher fees tend to be for more complex jobs. So if you don’t mind managing sub’s, you can save some cash by hiring and managing your own contractors for each part of the job (floor, cabinets, counter tops, tile, electrical, plumbing, painting, etc.) Caution; think this is easy? Talk to your friends who have tried to be their own general contractor. If you are working and raising kids, take an honest look at your calender and figure out where you’ll squeeze in 10 or 20 hours per week for the next four months and that 20% might seem like a deal!
In addition, if you are a good DIY’er, you can bring down the costs through a bit of sweat equity. One curious thing to keep in mind though is that well known general contractors can often get lower costs from suppliers and sub-contractors than walk-ins off the street; I have seen as much as a 10% mark down for generals.
But my home really sucks
Homes that are in poor condition suffer a loss of value from a lot of factors, only some of which have to do with cost to repair. Here is where the smart investors and homeowners make some dough. Lets say an average home on your street is selling for $200,000, and lets say your home needs new everything and the cost to fix up is $50,000. Your home should be worth $150,000 right?
A quick check with local Realtors and you find out “fixers” are selling for $125,000. Where did that $25,000 go? If you had to choose between a $200,000 home in good condition and a fixer that required $50,000 in repairs and is selling for $150,000 why would you bother with the fixer? Why take on all that work and worry for nothing?
See the point? If you buy that fixer, you want to make a bit of equity for taking on all that work and worry, that’s called “entrepreneurial profit,” which is the money you should make for doing the hard work and taking the risk. The issues of fixer-uppers has come to the forefront of real estate news with the housing market crash. As banks foreclose on homes by the thousands, the banks have learned, albeit v-e-r-y s-l-o-w-l-y, that it is better to remodel a fixer before you try and sell it.
Hey, all my neighbors have 3 bedrooms
Here is another case where you can come out on top with costs, maybe. Adding rooms to a home can be bloody expensive, but if you have a 2 bedroom home and the norm for the area is 3 or 4 bedrooms, you may be able to recoup the cost of adding a bedroom if you can keep costs down. Similar situations arise with adding a 2 car garage, or a 2nd full bath.
Time for a plug; talk to local Realtor and appraiser
Home value is where we started this chat. If home prices are rising, then the cash you’ll loose in a remodel is a wash after a bit of time. But what about in this current mess of a market? If prices are falling, you’ll only be farther behind the cash curve if you need to sell; if prices are mushy what then? What if your neighborhood is flat and full of foreclosures when the new condo development is going gang busters?
Information is key, and good information is king. Many of the on-line sites such as Trulia and the public side of Realtors MLS do a decent job of giving the big picture, but they do not always tell the whole story or give you enough specific information. No, it’s not rocket science, but with the advent of easy-to-find information hard facts can be over simplified or missed all together.
And yes I highlighted “local” in the tag line. Another nasty about on-line information is that its easy to pass yourself off as a local expert when in fact you could not tell me anything important about my neighborhood, like where is the best burger joint or Starbucks!
How many times did folks tell you prices were still going up in 2008, or that the market was “recovering” in 2010? Do you read “home prices on the rise” on the front page of the news paper? Yeah, so do I and it ain’t always so Joe. There is a reason real estate professionals like me certify that we follow a set of standards and pay thousands of dollars to subscribe to the MLS. The devil is always in the details, and the details are sometimes sorely lacking in real estate websites that sell adds for a living.
Dear DIY’er, this is for you
A line from an old movie ” , , there are a thousand ways to screw up a crime and a genius can only think of half of them, and your no genius , , .” I can’t remember the movie, but I remember the line very well.
If you are going to add a room, move a wall or change the floor plan, , , , hire a certified architect. The architect engineer will survey your home and land, research building codes, foundation stress requirements, load bearing roof certifications, , this list really does go on and on. The cost of a set of certified plans with reliable cost estimates can be a few thousand dollars. The cost of fixing a screwed-up room addition half way through a project can bankrupt you. I don’t care if you are good at carpentry, wiring and plumbing, hire an architect!
The bottom line
I have been told you never now how strong your marriage is until you wallpaper a bathroom together. In my case shopping for wallpaper was enough of a lesson. Even when you hire a general contractor you have a lot of work to do. Make sure you know and track your budget; it is so easy to spend and extra few bucks here and there and before you know it your $20,000 over budget. Plan on coming in below budget as its best to have a fudge factor for the unforeseen costs that always come up; 10% to 15% is not unreasonable.
Enough challenges arise on the best planned jobs, don’t go into a major remodel with your eyes closed.
The real bottom line
I’ve been appraising and consulting in construction for over 20 years, and have seen far more wonderful success stories than I have bad stuff, but I’ve seen enough of both. One thing I know for sure, coffee taste the same in an old kitchen as it does in a new one, and you can take that to the bank!