Does remodeling make economic sense?

Jan 28, 2018

Anyone visiting a weekend open house knows that most for-sale properties today have been “staged” to show them at their best and most appealing. Some would-be home sellers have wondered whether it might be better to go one step beyond staging and do a remodel of their home to increase its value. After all, who’s not impressed by a brand new, state-of-the-art kitchen and bathroom?

The remodeling industry chalked up sales of more than $340 billion in 2017—a 7.5% increase from the previous year. Are these homeowners onto some financial secret? Can remodeling increase the value of a home?

The simple answer is yes—but it is unlikely that spending money on a major remodel will translate into a high enough sales price to justify the expense. According to a recent survey completed by Harvard University’s Joint Center for Housing Studies, the average recovery of remodeling costs is 56%. This means that spending $20,000 to update an older kitchen to a shiny new on will increase the value of the home by only about $11,200.

There are some improvements that may offer better numbers. Replacing and modernizing structural items, such as garage doors and windows, can give a return of 75% of their cost. Interior projects tend to have less favorable returns: adding a master suite, for example, may increase the value by 56.6% of its cost—and this represents a 14.7% drop from the previous year. Major kitchen upgrades return about 56%, down 10.9% from last year.

Reining in the cost and extent of remodels can provide better returns. A minor kitchen update can return up to 81% of its cost. Bathroom tune-ups are much the same. Buyers respond favorably to appliances and fixtures that are functional and new.

Many homeowners, aware of rising interest rates and prices, are turning to remodeling to avoid a move, choosing to spend money to make their homes more livable and attractive over a longer period, not so much for resale value.

If you are contemplating a remodel, you should decide whether you are hoping to increase the value of your home for resale in the immediate future, or whether you simply want to make your property more livable over a longer period. If you are planning to sell, you should think twice about spending the money, since you’ll only get a portion of it back in the form of a higher sales price.

 

Source: TBWS

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