Printer Friendly

High-yield home improvements: looking to boost the market value of your home? The word is kitchens pay off; pools don't. Here's why.

The scene: Westchester County, New York; 1988. Brian and Katherine Matheson just grabbed their slice of a stratospheric real estate market, buying a spacious, six-year-old, two-bedroom townhouse in North White Plains for $280,000. They promptly began feathering their contemporary nest by painting and recarpeting, refinishing the deck, adding an alarm system and upgrading both baths in Italian marble - a total renovation bill of $20,000.

Fast forward to 1993. "By now, the market has fallen out from under us," observes Brian, whose children have also made the lavish townhouse cramped and "ridiculous." in search of more comfortable living quarters, the couple is starting to build a five-bedroom house from scratch in the nearby town of Armonk.

As it happens, the Mathesons lucked out. Their builder has offered them a trade-in/trade-up deal: He will sell the old townhouse and guarantee the Mathesons at least the house's appraised value. That's about $250,000, a disappointing 30,000 less than their purchase price. But the Mathesons are at least sharing their pain. The builder has steadily dropped the townhouse's asking price, which now hovers below $230,000 - but no takers. What sort of return will the couple ever see on their $20,000 in improvements?" Well, that's an issue that they would rather not discuss.

Scenarios like this are not uncommon and are forcing homeowners to have a more jaded view of real estate investment. During the '70s and '80s, magazines brimmed with "sweat equity" sagas of renovated homes reaping huge resale profits. But many of those homeowners, though portrayed as canny navigators, were actually riding a rising tide that carried too many boats.

The Party's Over

"In many parts of the country, particularly California and the Northeast, real estate values rose 10%, 15%, even 25% a year over the last two decades. So, inflation bailed out homeowners in every case," explains Walt Stoeppelwerth, publisher of the Washington, D.C.-based Home Tech Information Systems. "If you bought a house for $100,000, put in a $25,000 kitchen, and home prices locally went up 20% a year, you'd get your money back, no problem," adds Stoeppelwerth, whose company publishes remodeling manuals.

But the 90s came and the boom went bust. Starting around 1989, high-flying coastal markets saw home values plummet as much as 30%. In other regions, prices merely leveled off. More recently, the overall picture-with much regional variation - has brightened only slightly.

"I think home prices will outpace inflation, but not by leaps and bounds,- prophesizes Dean Crist, a research economist with the National Association of Home Builders (NAHB) in Washington, D.C. Home values should steadily increase at around 4% to 5% annually, but, he adds, "you're not going to see increases at the rates we saw in the '70s and '80s."

What does that mean in terms of fixing up your house? "With a very stable market, renovation becomes riskier," explains William Middlebrook, president of the Tallahassee, Fla.-based American Society of Appraisers. Slowly rising or flat house prices are slow to amortize an improvement's costs, while buyers, with their pick of a large inventory of unsold houses, are loath to pay the difference.

If you're thinking about remodeling, decide how long you're likely to stay put, advises Middlebrook. If you're selling soon, modest cosmetic changes - paint, a little landscaping, maybe a now carpet or counter - are more likely to recoup your costs. If you're settling in for the long haul, you might consider more dramatic structural changes, but only if they truly suit your needs. -Take into account the amenities that you, as the current owner, would enjoy, because you probably won't get back, dollar for dollar, what you put in," Middlebrook says.

Remodeling can have another value, not always measurable on the bottom line - a faster, easier sale. "Given a choice, people want a house they can move right into," notes Kendall Holmes, senior editor at Remodeling, a Washington, D.C., industry publication. "In a slow market, a house that obviously needs work is either going to sit there with no offers, or sell at a real discount." Or to put it more bluntly, "a house isn't worth anything if you can't sell it," cautions Paul E. Lee of Paul E. Lee & Associates, a Baltimore appraiser.

Improvements or Overimprovements?

One misstep for the Mathesons was pouring too much money into a starter home. The development's residences were new and uniform. Even if the market had held, their place with its marble baths would be inappropriate in that neighborhood.

Value-added remodeling begins with a good understanding of the local real estate market. In most neighborhoods, home prices span a fairly narrow range. If yours is already pushing the top, expensive improvements are apt to price you out of the local market. Overimprovements, such as a master bath with a sunken whirlpool tub and luxurious finishes, rarely pay off at resale.

"The more mainstream your changes and the more in keeping with similar houses in the neighborhood, the more likely you are to recoup your money," advises Christopher Nicholson, a spokesman for the NAHB's Remodelors Council. If you crave a luxury feature, indulge yourself, but don't count on the next buyer to share your enthusiasm. People always ask us, 'I want to put in an Olympic-size swimming pool - how can I recoup my investment?"' continues Nicholson. "Well, I'd say' sell your house to Mark Spitz when you're done.'"

Even homeowners who benefited from a runup in house prices can still regret overimprovement. In 1977, David and Carolyn McCalla bought a rambling '60s-style four-bedroom ranch house in a stable Miami suburb for 69,000. Over the next fifteen years,they pumped in almost $45,000 for various improvements, including a housewide intercom/stereo system, pool fence, sprinkler system, new patio and a 500-square-foot family room/bedroom addition. When they sold the house in 1992 for $121,000, the transaction didn't look too bad on paper.

"But the house was really worth about $150,000 based on square footage and otherfeatures," says David. "The problem was that no house in our neighborhood had ever sold for more than $130,000." Despite the rise in prices, the McCallas didn't feel they got $45,000 more than sellers of unimproved houses nearby.

On an Upward Trend

On the flip side, a house beneath the neighborhood average, or one bought below the going prices, has more payback potential. If you're in an up-and-coming area rife with renovation early, you may have more leeway in your improvements. About eight years ago, homeowners Doris Harrell and her husband Doug Lyons scouted out a section of Atlanta with handsome but neglected Victorian-style houses, and picked a three-bedroom charmer with four fireplaces, hardwood floors and 13-foot ceilings. Their instincts were right, as the site's convenience to downtown, its strong neighborhood character and its designation as an historic district increased the house's desirability. With only modest improvements and maintenance, its value has gone from an initial purchase price of $64,000 to an estimated value of nearly $100,000.

To assess how your improved home might fare at resale, get to know the competition, the comparable houses in the immediate area. A knowledgeable real estate broker can estimate your house's current value as is and with your proposed improvements. A professional appraiser's more detailed report will cost between $150 and $350.

Also get a feel for the market's vitality by taking an unsentimental look at your neighborhood. How long are those "For Sale" signs hanging out? How close are the asking and selling prices? Is there a glut of new homes on the market? Does it offer what buyers are looking for, including good public schools, easy transportation, cultural or natural amenities, low crime rates and strict zoning?

Also, consider your renovation's total effect. Will the addition be graceful or will it look like the tail is wagging the dog? Will the house still harmonize with the surroundings?

Professional contractor Rod Stewart, president of the Grand Rapids, Mich.-based Security Builders Inc., recalls one such project: "The architect had given the house a contemporary style that went way off the deep end. Maybe it suited that homeowner's fancy, but in the traditional neighborhood, it stuck out like a sore thumb. At resale, you could hardly give the house away."

Here are some pointers on specific areas for improvement:


Vital to daily life and quickly worn and dated, kitchens are the leading remodeling project. They also offer the best payback. "A fairly minor kitchen remodeling - new flooring, new laminate counters, a new appliance or two, new lighting and refinishing the cabinets - consistently comes up as the number one payback item," notes Remodeling editor Kendall Holmes, who oversees the magazine's annual "Cost vs. Value" survey (see box). According to the study, a well-planned face-lift can retrieve, on average, 104% of its costs. A more thorough gut-and-replace renovation, which will usually push $20,000, is less likely to recoup its full price - but it can pay back handsomely.

Be warned though: It's all too easy to go overboard on kitchens. Custom-made cabinets, at $11,000to $20,000, can be double or triple the cost of good stock storage units; stylish European lines can run even higher. Similarly, laminate counters cost about $15 per square foot, while fashionable granite-slab or solid surface can easily triple that outlay. Commercial stoves cost from $1,800 to $7,000, versus $400 to $1,000 for a standard residental model.


Baths run a close second as the most often remodeled room. "The median house age is almost 30 years - back when most houses only had one bathroom," points out NAHB's Nicholson. Today, new houses commonly boast 2 1/2 baths. "So adding a second bath might get you all your money back," he continues, "and it might also be the difference between selling and not selling your home." A face-lift of an existing bath can also have a substantial payback, from 60% to 90%, particularly if tastefully done in neutral tones.

If resale is on your mind, don't be lured into $400 nickel-plated fixtures, $2,500 whirlpool tubs or marble tile at $25 per square foot, unless they've become de rigueur in your locale. "Occasionally I'll get a phone call, with a homeowner saying, 'I just spent $10,000 on this new bathroom and if s better than any you'll find in the neighborhood,'" says appraiser Lee. That's just the problem, he points out when the appraiser tests the market and finds no demand for such features.

Exterior Improvements

The value of exterior work depends heavily on location. "In San Francisco, where lots are small and uneven, a deck adds considerable value," says Nicholson. "Out in the Midwest where you might have all sorts of land, a dock is not as big a deal." With payback estimates ranging from 36% to 140%, the Remodeling survey tags the average 16'-by-20' pressure-treated wood deck, costing $5,731, with a 78% return. Redwood construction might cost from 25% to 50% extra - an upgrade most buyers wouldn't understand or be willing to pay for. Even when the payback isn't high, decks, particularly with pleasing views, can attract buyers.

Broker Patsy Dodgson, of Greenridge Realty in Grand Rapids, stresses the curb appeal of greenery. "If you drive up to a house and ifs not nicely landscaped or worse yet looks ragged, that definitely affects the chances for a sale." She also notes that access to the outdoors, such as sunny French doors leading to a dock or patio, make a house more desirable.

A simple landscaping project, whose costs may begin well below $1,000, can have a reasonable payback, if it's well planned. A local retail nursery may throw in design help with the plants you select, provided you buy enough. For a larger project, a professional landscape architect might charge 8% of the total cost. Plants that require little watering and maintenance add to your own satisfaction as well.

Tastes in exterior finishes vary by region. A fresh exterior paint job, particularly a do-it-yourself project, usually promotes a high payback and a quicker sale. The capital investment in low-maintenance siding is popular where climates are harsh; older homeowners may be particularly interested in foregoing periodic repainting. But sales agents still report strong preferences for wood, stucco or brick in certain markets. For adding insulated vinyl or aluminum siding, at an average cost of $9,052, Remodeling's city-by-city payback estimates range from 30% in Boise, Idaho, to 128% in Ridgewood, NJ. The national average payback was 7l%.

Miscellaneous Renovations:

Smart and Not So Smart

* Garages, though desirable, typically have a poor payback. Buyers more or less expect them, and aren't willing to pay the $10,000 to $20,000 needed to build one from the ground up.

* Fireplaces are catnip to many buyers, even in warm climates. Adding a prefabricated fireplace might cost $2,000 and $5,000, and fetch a return of 70% to 100%.

* Bringing sunlight inside also freshens an older house - and can reduce heating bills. The installation of an operable skylight can start at $600 and run to more than $1,000. Choose quality units to avoid leaks. According to Remodeling's survey, replacing 16 existing single-pane windows with energy-efficient vinyl or vinyl-clad aluminum windows costs, on a national average, $7,315. The recouped value is 72%.

* Lighting can also be a cost-effective way to update a house. "We have more varied lighting options available today - recessed, track, low-voltage halogen fixtures, cove lighting," observes Grand Rapids interior designer Ronald E. Frey of The Frey Company. "Replacing that one fluorescent fixture in the center of the kitchen with new track and undercabinet lighting creates a more dramatic and more functional room."

* Projects such as aluminum siding and new French windows blur the boundary between standard maintenance and major improvements - between what buyers simply expect and what they'll pay extra for. "If you've let maintenance go over the years, such work just brings the house back up to the neighborhood standard," says Kendall Holmes.

* Routine maintenance can prop up a house's value, while major mechanical or structural improvements seldom pay back their full price. Such projects are more a defensive measure: A seriously deficient roof or heating system can drag down the house's value, and make a mortgage lender nervous.

Individual Choices

Also consider this: A home improvement's potential value needs to be weighed against the cost of trading up. Many mid-market buyers figure once they pay the standard 6% to 7% broker's fee to sell their old home and lay out a similar percentage on the new house's closing costs, they won't have much money left to trade up to a significantly better home. If the homeowner's needs are specific and reasonably affordable, they may well may be better served by renovation than relocation.

"Sometimes I say to a homeowner, 'Buy a bedroom, not a whole new house'," says contractor Rod Stewart. However, many real estate experts advise that if your renovations will cost more than 15% to 20% of your house's current value, it may be financially smarter to move up to what you want.

"Houses can't always looked at as investments," says Greenridge Realty's Patsy Dodgson. "While it's a good place to have your money invested, we're coming back to thinking of the home as simply a home, the way things were once upon a time." In the dicey world of real estate, you can improve your chance of profits by clearly understanding your local market, keeping a firm hand on the quality level and cost of improvements and holding on for the long term. But the market's wayward forces can easily snatch away a resale windfall. So, even as you work to maintain and increase your house's value, appreciate it for something more that just its ability to appreciate.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Wills, Margaret Sabo
Publication:Black Enterprise
Date:Nov 1, 1993
Previous Article:Crunch time for Bert Collins: North Carolina Mutual's CEO is shrewd. But can he inspire the innovations needed to keep his insurance firm competitive?
Next Article:Black Enterprise 1994 auto guide: best values.

Related Articles
Customers and commitment.
Avoiding home improvement disasters.
ARM funds for safety and yield.
Investing for dividend growth.
Picking the top performers.
Spruce up for profits.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters