In many ways the housing market resembles a high-stakes poker game. For the last few years, people across the country have been snapping up big, unaffordable mortgages, putting their financial security on the line. Now more cards have turned over — falling prices, evaporating equity, resetting interest rates — and it’s time to make a final, momentous decision: Call, raise, or fold?
If your heart is thumping over these economic conditions, you’re not alone. For most American families, their home is their single greatest investment. But if things seem dire, you still have an ace in the hole. Smart, targeted renovation projects can help you sell your home quickly and for a higher price.
“Some markets, like Miami, now have several years’ worth of [condo] inventory on the market,” notes Mark Foreman, vice president of the National Association of Realtors and owner of Cornerstone Capital Mortgage and Real Estate in Fairfield, Connecticut. “So when you have more choices as a buyer, you’re obviously going to look for a house that’s in the best condition.”
Before we get to the good news — including four projects that could rev up your home’s value — here’s the bad. In March, national home prices were down 7.7% from a year ago, according to the National Association of Realtors. What’s more, existing home sales were down 19.3% over the same time period, and recently the inventory of unsold homes reached 10 months, the largest overhang since October 1981.
In light of these statistics, smart, economical home renovations could be a crucial strategy for home sellers. Spending money on low-return projects or whims that are out of sync with your neighborhood is the same as tossing cash out of a window. On the following pages, we’ll review the most economical ways to allocate your dollars, cover legal bases, and avoid renovation nightmares. And since all real estate is local, we reveal how to tailor home improvement efforts to meet buyer expectations in any market.
By doing things right, you may be as successful as Donald and Christine Harvey. The Fairfax, Virginia, couple — she’s a stay-at-home mom to 6-year-old Michael, and he’s a vice president with a large staffing firm — loved their location but weren’t crazy about the builder’s grade fixtures in the home they bought for $525,000 in 1999. So at the end of 2005, they gutted the place and created their dream home. Today, the Harveys live in a five-bedroom, 6,500-square-foot French country-inspired manse complete with a saltwater aquarium and top-of-the-line kitchen.
The national housing market is still a risky business and will probably stay that way for a while. But the Harveys proved that through proper planning you can renovate your home to your specifications and increase its value. They created a luxurious villa that they plan to enjoy for another 10 to 15 years. “Every time we come back to the house, we go ‘Aaahh,’ ” says Christine, smiling. “We just never tire of it.”
DON’T RENOVATE YOUR WAY INTO THE POORHOUSE
In economics, it’s called the law of diminishing returns: The more you put into a project, the less you get back. While every home and community are unique, it’s a sound principle to keep in mind when it comes to home improvement. “The important thing is for the consumer to make sure they don’t over-improve for their area,” says NAR’s Foreman, because buyers compare sales of other homes in the neighborhood to determine a property’s fair value.
It’s usually a better investment to own the least expensive home in a great community than the priciest. “You never want to have the most expensive house around, a $2 million home in a $1 million neighborhood,” says Foreman.
So what should you do? Target your renovations to meet local expectations. Some buyers might expect hardwood floors, but you don’t need to buy wide-plank Brazilian cherrywood. Imported Italian granite in the kitchen is lovely, but it might be overkill if a decent acrylic surface countertop would do the trick.
Spending no more than 25% to 30% of your home’s value on renovations is a rule of thumb, according to John Frazier Sr., owner of John F. Design and Remodel in Portland, Oregon. That means that a tricked-out, $250,000 kitchen may make sense in a $900,000-plus home since it would likely push the selling price into the million-dollar range. But “you never want to put a $250,000 kitchen in a $100,000 house,” advises Tamara Ruffin-Walker, a senior associate vice president with Bethesda, Maryland-based Case Design/Remodeling Inc., the nation’s largest full-service remodeling firm with franchises nationwide. “You should keep with the style and scale of other homes in the neighborhood.”
For the Harveys, who hired Case to redo their home, their expenses were quite high at more than $600,000, but considering that the home has since been appraised at a cool $1.5 million, the costs were not outrageous. Moreover, the couple didn’t renovate just to flip the property; they wanted to create the ideal setting in which to raise their son. “Don’t price yourself right out of the market,” advises Christine. “We’re now at the high end of the neighborhood, but we did it with the long-term in mind, knowing we’re not going to move for a while.”
To determine a reasonable renovation budget, figure out how much equity you have in your house. If you’ve been living there long enough to build up significant equity, you’ll have more leeway. On the other hand, if you’ve been in your home only a couple of years and taken out 90% or even 100% financing, you won’t have enough equity to work with and will likely need to scale back your plans.
To-Do List: Four smart renovations
So you’ve lined up your finances and now you’re ready to renovate. Where do you begin? Real estate experts say the following four areas bring enjoyment, increase property values, and get potential buyers to sign on the dotted line.
Curb appeal
When picky buyers drive up to your open house and don’t like what they see, they keep moving — especially in these times, when it’s a buyer’s market. “We’re now seeing a lot of renovation shift to the exterior: new siding, new windows, new landscaping,” says Foreman. “After all, that’s your first impression.” Indeed, unsexy projects such as siding replacement can recoup up to 88% of the costs upon resale; window replacements recoup up to 81%, according to Remodeling magazine’s annual Cost vs. Value Report. And landscape design can power up your home’s value by as much as 12%, according to the American Society of Landscape Architects.
Kitchens
This part of the home is the perennial champion of home renovations. Even bargain hunters now feel entitled to an island, granite counters, and stainless steel appliances. “That’s the big one,” says Leonard Woods, a board certified consumer/commercial law specialist with Austin, Texas-based Davis & Wilkerson, a law firm that has represented scores of remodelers and homeowners over the years. “All buyers I’ve ever met imagine themselves in that space most of all.” The kitchen’s importance is born out in the analysis contained in the Cost vs. Value Report: You’ll recoup 83% of the cost of even a minor kitchen renovation.
Bathrooms
In our busy, complex world, buyers want to come home and relax in a spa — or something close to it. That’s why you might want to take your vintage bathroom up a few notches and create a personal sanctuary. A bathroom redo, according to the Cost vs. Value Report, will recoup 78% of the costs, but it might mean paying for pricey touches such as jetted tubs, double sinks, and large imported tiles. Bathroom improvements require a lot of time and resources, so do them a few years before you plan to sell; that way you can enjoy the fruits of your labor.
Maximizing existing space
By extending a home’s living quarters outdoors, you’ll recoup 85% of your expenses, according to the Cost vs. Value Report, especially in Southern and Southwestern locales. For example, you might build a deck on a portion of empty backyard. “In warmer climates like Austin’s, people enjoy their outdoor dining and entertainment areas 11 months out of the year,” says Woods. Transforming an old basement into an entertainment room, in-law suite, or play area for the kids not only ramps up useable space, it can often seal the deal for many potential buyers.
Don’ts: Four projects to avoid
As the adage goes, all real estate is local. And every renovation project is individual. You may love the pricey home theater with cinema-style seating and wall-sized flat screen, but a potential buyer might want to take a sledgehammer to it. With that in mind, the following projects might not be worth your time or money — and might even turn buyers off.
Swimming pools
Only undertake this project if your family is passionate about swimming, because many buyers will cross a home with a swimming pool off their list, sight unseen. Why? Safety. As the authors of the best-selling book Freakonomics (William Morrow; $27.95) cited, a loaded gun in a house poses less danger to a child than a backyard swimming pool. A child is far more likely to die in a pool. In addition, ongoing pool-related construction can jack up costs beyond what you’ve budgeted.
Unwanted additions
You may think that adding a sunroom will make your house irresistible to buyers, but the numbers don’t lie. According to the Cost vs. Value Report, sunrooms often recoup the lowest percentage of dollars compared with any other renovation project — not even 60% of the expense. Thinking of a master suite or garage addition? You’ll only recoup 64%. “Expanding the footprint” doesn’t necessarily do a whole lot for the value of your home, says Foreman. By simply finishing a basement or attic you can often achieve the same results of increasing useable space without having to knock down walls and spend thousands of dollars.
Formal living and dining rooms
They may look pretty, but people hardly use them anymore. Today’s trends are all about casual living: great rooms where open spaces flow into each other, or outdoor patios where guests dine by a barbecue pit.
Home offices
If you need an expansive office for your home-based business, by all means design one. But don’t think the space will provide you with a gusher of cash if you sell your house. The Cost vs. Value Report singles out home office renovations as one of the most lackluster projects, recouping only 57% of expenses. Instead, think about marketing that space as an additional bedroom. Four-bedroom homes naturally fetch higher prices from growing families.
A PRENUP FOR THE HOME
Think of a home improvement job as the beginning of a marriage, full of dreams and optimism. But unfortunately, with remodeling, as with marital bliss, sometimes it all ends up in court. “On the front end, everyone is ‘in love’ and willing to agree,” says Leonard Woods, an Austin-based attorney. “Once there are problems and the ‘divorce’ starts, no one will agree to anything.”
That’s why you need to conduct due diligence up front. Think of it as a remodeling prenup. Here are a few tips about how to protect yourself in case a home renovation goes sour:
Do your homework. Check out your prospective contractor with the Better Business Bureau, and investigate whether the company has received complaints from past customers. “A lot of people get scammed” by fly-by-night operations, says Case’s Ruffin-Walker. Also, beware of rip-off artists who knock on your door and ask to inspect your roof or repair your driveway.
Get everything in writing. Every detail of the job should be spelled out in an ironclad contract. If not, legal disputes may arise. Don’t try to draw up the contract yourself. You’ll find that it’s worth the expense of hiring an attorney who specializes in commercial litigation or consumer law. Contact your local bar association for referrals.
Check up on insurance coverage. Make sure any crew working on your property is fully insured. They should have a general liability policy and a workers’ compensation policy. Remember, if a worker steps on a nail or suffers any other type of injury on your property, you’ll be liable if the contractor isn’t adequately protected. Obtain a completion bond. What happens if your contractor builds a backyard gazebo and it promptly collapses? The firm’s insurance policies might not even cover such an incident. Obtaining a completion bond ensures that all work will be done according to specifications.
Expect the unexpected. Experts say you should expect construction costs to exceed, at a minimum, 25% of the budget. Also, factor in unpredictable elements, like uncooperative weather and material shipment delays, which can push back your ideal schedule.
It seems that everyone in the U.S. has either been through a home-remodeling nightmare or knows someone who has. To help maximize your chances of avoiding one, visit the following Websites:
Consumer Advocate Jody Costello: You might come across some bad apples in the remodeling field (as in any industry). If you do, Costello’s site will help you review your rights, find an attorney, and get out of a remodeling fiasco with minimal damage to your home and finances.
National Association of Home Builders: Primarily for those building a home from scratch, this site is chock-full of information on the building process. Click on “Resources” then “For consumers” for a terrific soup-to-nuts guide.
National Association of the Remodeling Industry: A great resource for finding qualified contractors, this site also offers consumer-friendly tips. For example, an insurance certificate isn’t enough because it doesn’t tell you whether the policy is still current.
Remodeling magazine: Not only does this site tell you if your planned renovation will recoup much of your costs, it breaks down numbers by nine different regions in the country.
This story originally appeared in the June 2008 issue of Black Enterprise magazine.