In a slumping housing market, remodeling projects don't guarantee the return they once did. But that doesn't mean no update is worth doing.
Barbecuing at our house isn't as appetizing as it could be. Since we moved in four years ago, we've been flipping burgers in the driveway, right next to the garbage cans and recycling bins.
Yes, I've been dreaming about building a deck—a two-level sanctuary with a gazebo to isolate us from bugs—made of composite decking, which means no splinters or stains and little maintenance. I asked a contractor to come by and give me a written estimate. When he handed it to me, I just stared at the paper. After a few minutes of silence, the contractor asked, "Are you okay?"
I wasn't. I was stunned. Barbecuing in the driveway didn't seem so bad after all.
There was a time when homeowners would plunk down for major renovating projects with nary a twitch. With home prices rising at eye-popping rates, we calculated the cost of improvements against what they would bring in when we sold. Adding a room or a deck was the next best thing to getting something for free.
But in a down market, big renovations—even the new kitchens and bathrooms that used to practically guarantee a profit—no longer pay dollar for dollar. A survey of real estate appraisers published by Consumer Reports in September found that kitchen and bathroom remodels now recover as little as 50 percent of what they cost.
That doesn't mean that no renovating job is worth doing. Like anything in real estate, the value of a fix-up always depends on where you live and what the local market is doing. But more important is how long you're going to live there, and how much you're planning to spend. Here's a breakdown of the kind of repairs that make sense for homeowners in different situations.
1. Ready to sell
2. Selling someday, but not soon
3. Never selling
If you're ready to sell...
To attract buyers in the current real estate market, you've got to look your best. But to protect your interests, you have to spend the least. According to Remodeling magazine's annual "Cost vs. Value Report," the projects that earned back the highest percentage of their expense in 2007, the last year available, were exterior upgrades. Among the top items on Remodeling's list is replacing old or worn siding, which returned 83 percent, or more than $8,200 of an average layout of $9,900. New wood windows did almost as well, boosting the sale price by as much as 81 percent of what they cost.
Still, you may point out, the snappy new siding will have set you back $1,700 when all is said and done. And you'd be right: Even highly recoupable improvements are a bit of a gamble. Remember, however, that the longer your house is on the market, the more likely you are to lose heart and drop your price, or lose that low rate on the mortgage for your new place. If you've already moved out, every month you don't sell is another mortgage payment on an empty house. In such cases, the new siding may reduce the time it takes to find a buyer, saving you that $1,700 and then some.
Not every project with a high rate of return, of course, is the kind that sells a house in a hurry. Take my deck, for instance. A traditional 16-by-20-foot wooden deck will earn back 85 percent of its average cost of $10,300. That beats the new siding. But as an inducement to speed up the sale of a home, experts say, a deck can't compete with a nicely done kitchen or bathroom, or even a purely cosmetic (and much cheaper) upgrade like a paint job.
As a rule, spend the least you think it will take to sell the house. If you feel your dismally outdated kitchen will turn buyers off, don't gut it. Simply swap out the cabinet doors and drawer facings and get back about 83 percent of what they cost.
If you're selling someday, but not soon...
The logic is different if you're planning to stick around until the market improves or your family outgrows the house. In this case, the return on your money includes a nice place to live.
For example, when my husband and I moved into our house, we each wanted our own home office, complete with built-in bookcases and cabinets. Now, remodeling one office recovers only 57 percent of its $27,200 average cost—near the bottom of return rates for all projects. There's no telling how much we'll recover for our his-and-hers work spaces. But I don't care. I'm a pack rat, and my husband loves to de-clutter. Having separate offices is an investment in my marriage.
So if you're longing for another bathroom, don't let a lower recoup rate shut the project down. Instead, justify the cost by accounting in hard numbers for your comfort. This is how it works: Adding a 6-by-8-foot full bath, at a national average of about $37,000, repaid only $24,420, or 66 percent, at resale. That works out to $12,580 you'll never see again. But if you stay in the house six more years, you'll get to use a brand new bath for $2,096 a year, or a little less than $6 a day.
Still too expensive? Keep in mind that national averages are sometimes inflated by homeowners who flew in that Italian marble for the bathroom or splurged on a pricey Sub-Zero fridge. You'll likely be able to squeeze out higher margins of return if you economize in every phase of the work. "Whether it's labor or materials—down to the appliances you buy," says HGTV's Designed to Sell co-star Lisa LaPorta, "shop around, compare, and get multiple prices."
Finally, you may also find that a particular project gives back a lot more or less, depending on where you live: According to the Remodeling report, a new deck had a 94 percent payback rate in Los Angeles, where outdoor living is a year-round prospect, but just 57 percent in Columbus, Ohio.
If you're never selling...
You've vowed that you'll never move again. Then you shouldn't think about improvement as an investment in anything but your happiness. Some of the most fulfilling additions are those that refund the least.
Tops in this category is a master bedroom suite. A 24-by-16-foot bedroom with extras like a walk-in closet, a whirlpool tub, and a dressing area can cost as much as $100,000. The day your builder drives in the last nail, your new bedroom is only worth about 69 percent of that amount. So what? You can't put a price on a good night's sleep. (For the record, though, it's more reasonable than even what the short-term homeowner pays for his bathroom: Amortize the lost $31,000 over 30 years and you'll find your new sleeping quarters cost less than $3 a night.) Add a sunroom and kiss 41 percent of almost $70,000 goodbye forever. But think of all the pleasant days you'll spend in those rooms: priceless.
If that kind of indulgence is too much for your financial ethics, consider that renovations can save money in other ways. A 20-by-30-foot basement entertainment room with a wet bar and a 5-by-8-foot full bath can cost $60,000 and up. Sure, only 75 percent of that goes into your bottom line, but entertaining at home means filling your gas tank less often. We built a theater room in our home, and now every Friday is a low-cost family movie night.
No matter how long you expect to be in your home, first figure out what you can truly afford. Borrowing for any of these projects seriously subtracts from your rate of return, not to mention your enjoyment of your new addition. The last thing you want is for financial concerns to spoil those precious moments that make your house a home—like the first bite of a perfectly grilled hamburger.
Michelle Singletary is a nationally syndicated finance columnist for The Washington Post.
Printed from Oprah.com on Tuesday, December 10, 2013
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