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Investing
in Home Remodeling Pays Off In More Than Dollars
Where can the average person
find a guaranteed (or almost guaranteed) positive return on
their investment? With the stock market refusing to offer
the surefire returns of prior years and Ann Arbor housing
prices continuing to rise, many Michigan homeowners are
surprised to learn that the answer to this question is all
around them. Literally.
For most people, the equity in
their home makes up a larger portion of their net wealth
than holdings in the stock market or retirement funds.
Compared to stocks and bonds, whose value rises and falls
with regular frequency, housing has been a relatively stable
and sound investment that keeps up with inflation in most
years and outpaces it in others.
Although very few of us
purchase a house solely for its investment value, the fact
is that your home is an asset that can pay high returns when
it comes time to either refinance or sell. Of course, not
all houses are created equal. A home that has up-to-date
systems and amenities will have a higher value than one that
doesn’t. A home that has been well-maintained has a greater
value than a comparable home that is poorly maintained. In
addition, a home that has the conveniences and extra living
space that today’s buyers want is a house that will offer a
higher rate of return on your investment when it’s time to
refinance or sell.
So, you own a home that may not be quite up to date and
you’re wondering what to do? Remodel, of course.
Home
Remodeling is the key to protecting and enhancing
the investment value of your home, not to mention its many
other benefits.
The National Association of
Home Builders estimates that American homeowners will spend
between $220 billion and $225 billion on remodeling projects
in 2007. In addition, home equity levels are at an all-time
high at $9 trillion.
Several factors are driving
the demand for home remodeling. One of the most important
factors is the increase in housing values over the last
several years. With home prices on the rise, more homeowners
are turning toward home remodeling to add to their quality
of life. Home remodeling also boosts the value of their
original investment.
Now, here’s the real issue:
What improvements adds the most value to your Michigan home?
To answer that question, it is important to understand that
a home remodeling project — and your home for that matter —
is different from a purely financial investment. What’s
unique about housing is that the investor, or owner,
receives the immediate benefit of being able to occupy and
enjoy their investment. That is, you get to live in it while
it is growing in value. Stocks and bonds don’t offer this
benefit. The longer you intend to stay in your home to enjoy
the new family room or whatever improvement you make, the
more weight this factor contributes to your overall return
on investment.
The other part of your
investment return is the increase in resale value that the
home remodeling project adds to your home. Ultimately, a
real estate appraiser will decide the financial return of
any home remodeling project through the price assigned to
your home when you decide to refinance or sell. The cold
hard truth, however, is that real estate appraisals are more
an art than an exacting science.
The value of your home depends largely upon "comps," or the
prices that comparable homes recently sold for in your
neighborhood. The value assigned to the home improvements
you made to your home depends on a number of variables, but
particularly on the location of your home as well as its
overall condition. Some remodeling projects lift the value
of a home by the entire cost of the remodel and sometimes by
even more. When you are deciding whether to undertake a home
remodeling project, you need to balance the cost of the
project with the values of the houses in your neighborhood.
If you plan to resell, you need to be careful not to add so
much to your home that you become out of balance with the
other houses around you. If so, you may not be able to
recover the project’s value when you try to sell.
Despite the limitations of the
appraisal process in allotting what you might consider a
fair value for all the improvements that you have made,
there are certain rules you should consider to increase the
dollars you get back from your remodeling investment: Take
care of your home. Maintaining your home is the most
critical of all investments that you can make to your home.
The shape it’s in matters as much if not more than what
other attributes your home may have.
Do high-quality work. The quality of the work you have done
on your home is another factor that can’t be ignored. If you
are looking to make a good investment, shoddy workmanship,
low-grade materials and inferior products will wipe out any
value the remodeling might have added to your home. Seek out
a remodelor who is a member of the local chapter of the
National Association of Home Builders. In Hamilton County,
that’s the Home Builders Association of Southern Tennessee.
Make sure you like the
project. Base the decision to remodel on what you and your
family want and need, not on what you think the next owner
might want. It is a gamble to predict what the likes and
dislikes of the next owner might be. Keep in mind, however,
that the more your tastes stray from the norm of most of
your neighbors, the less likely you are to get maximum
return from your improvements. Stay with styles, colors and
features that have broad appeal.
Kitchens and
baths. Year in and year out, kitchen and bath remodeling
projects are the most popular, no matter where you live.
Minor kitchen remodels tend to recoup more of their costs
than major kitchen remodels. Bathroom remodels also vary on
how much they add to resale value, depending on the extent
of the makeover. These two rooms carry the most weight when
it comes time to sell your home. Attractive kitchens and
baths fully outfitted with popular features will not only
help sell your home faster, they can also increase the price
that a buyer is willing to pay for your home. Remember to
keep in mind the overall value of houses in your
neighborhood when you decide on the magnitude of your total
expenditures.
Space, but in the right place.
Extra space in the right place offers a high rate of return
since existing homes tend to lack the roominess of new
homes. New family rooms, larger master bedroom suites and
eat-in kitchens are all examples of spaces that most buyers
value highly. If you are buying a new home, look for one
that has space available to finish at a later time.
Unfinished basements, bonus rooms and other unfinished areas
are great for adding value in the future.
Although it is difficult to put an exact price on the resale
value of a particular remodeling project, for most of us the
real value of remodeling is the comfort and pleasure it adds
to the years we spend living in our home. When you’re ready
to start that project you’ve wanted to do for so long, find
an experienced remodelor from the local building association
and ask his or her opinion. They can almost always give you
sound advice on the estimated costs of a project, whether
the project is worth the investment and what the project
will add to your quality of life.
Julian Bell III is executive officer of the Home Builders
Association of Southern Tennessee. He is among several
industry representatives who are contributing columns that
will appear in the Real Estate section on Sundays.
Article written by Julian Bell
III, 2004, Chattanooga Times Free Press, Inc
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