Fritschen agrees, "Almost without exception, if you have a viable neighborhood and if you are bringing your home up to or slightly above neighborhood standards, from the financial side you almost can't go wrong by renovating. On the other hand, if you already have the biggest, nicest house in the neighborhood, then to go in and change that house has some drawbacks. You won't get it back on resale."
That's because neighborhoods only support so much expense for a particular house. If home buyers want to spend $500,000 on a house, they will spend it in a neighborhood filled with other $500,000 or even $1 million homes, rather than $250,000 homes, Fritschen says.
The worst-case scenario would be doing a renovation and ending up with a home worth less than you put in plus an outstanding mortgage balance, and then being forced to move because of a job change or other life event. "It really depends on where your market is. You might not get your investment back," Sheehan says.
When to remodel
Expensive as it is to remodel, it is tempting to think moving is the safest bet. But that can be far from true, Fritschen says. "In moving, there is no payback. It is a pure expense," he says. "You end up writing an average of $40,000 in checks, and no matter where you move that money is gone. It doesn't increase your net worth -- it is just gone." People often underestimate the true costs of buying a new home: Real estate commissions, financing charges, moving costs, utility deposits and other unexpected bills pile up. Then there's the tax shock: "A lot of places don't necessarily reset your property tax every year for every homeowner," Fritschen says. "When you move it may go up dramatically. That may still be a consideration when you remodel, but generally not as much."
Comparatively, a remodeled home could appreciate by $100,000 or even $150,000, depending on what changes the owner makes, offsetting the expense of sprucing up things. The remodel could end up being financially neutral even after borrowing a huge sum to pay for renovations. Even if renovating makes sense, ask whether you are financially ready to lay out the amount of cash required to do the work. A $100,000 addition might increase the value of your home dollar for dollar, but if you can't afford that cash up front, you will never get the job off the ground.