Home improvements and house value

Dear Steve,

Dear Big D,
Real estate history tells us that homeowners should not expect to recover all of their money from remodeling. Certainly, it's not unheard of. But don't count on a profit. Rather, you should add a room or other components to make the place more comfortable for you and your husband, not to generate significant additional value.

There are several reasons you may not recoup your expenses. One of them is the "overbuilding factor." This occurs when your improvements make the home pricier than others in the neighborhood and surrounding vicinity. If that's the case, you'll have a tougher time holding out for that higher sale price, particularly in a soft market where nearby homes are much cheaper. However, if the improvements bring your house up to about the average price in your neighborhood, your return may be better.

Secondly, know what improvements hold their value best. Remodeling that pays for itself or nearly pays for itself at sales time includes installation of a new heating system, major and minor kitchen remodeling and a bathroom addition, studies show. Work that pays for about 75 percent to 85 percent of expenses includes installing a new air-conditioning system, building a family-room addition, remodeling a bathroom, adding a fireplace or new deck, and replacing windows. A sparkling new pool returns only about 40 percent while a finished basement yields just 15 percent.

The lesson here is that the more customized your renovations are, the less likely prospective buyers will like what you've done, because tastes vary widely. Of course, your own planned additions may come closer to paying for themselves since you are doing the work yourselves, assuming you know what you're doing and don't begrudge the loss of hundreds of personal labor hours. But make sure your improvements are consistent in character and color with the rest of your home, and if they will be obvious on the exterior, make sure they're also consistent with the neighborhood as well. Realize you'll also need to pay for the requisite city permits and for additional homeowners insurance.

A more elaborate breakdown of cost-to-value ratios, and a look at other pros and cons of home remodeling, can be found in the well-received book 101 Cost-Effective Ways to Increase the Value of Your Home by entrepreneur/home builder Steve Berges. He emphasizes that if an improvement is not highly visible, it probably won't result in much more market value.

Good luck, Big D.

-- Posted: Sept. 4, 2004