Cost vs. Value in Real Estate

KitchenRemodelSo you just renovated your kitchen to the tune of $80,000. It’s beautiful. Custom cabinetry, stone counter tops, radiant heat flooring, lots of recessed lighting, top of the line appliances. The value of your house just increased by $80,000, right? Unfortunately, in most cases, no- your house is not worth $80,000 more, but just a portion of that expense.

More often than not in real estate cost does not equal value. This can be a difficult concept for home owners to grasp. They just put a large chunk of change into an improvement; shouldn’t the next person be willing to value the improvements at their cost?

Every December the National Association of Realtors puts out a Cost vs. Value Report which shows average returns expected for different types of improvements that home owners can make. If you take a look at the report, you’ll see that most renovation projects only recoup somewhere between 60-70% of their cost.

So what should a home owner consider if they’re thinking about taking on a remodeling project? How can they try to maximize their return on investment for a project?

Here are the three questions I ask when someone calls me for my opinion on a renovation project they’re thinking about undertaking…

1. How much longer are you going to be in your home before you’ll move?
2. Are you doing this improvement for your own enjoyment or simply for resale?
3. What’s the budget for the project and what will the finishes be like?

In addition to listening to the home owner’s answers to these questions, I’m also considering the neighborhood where their house is located and how this renovation will affect the house for the neighborhood where it exists. Essentially, will the improvement price the house out of the neighborhood or will it remain in line with its neighbors?

When you’re considering an upgrade to your home, hopefully you’ll be living there for at least a few more years so that you can enjoy it. While this doesn’t necessarily improve the return on the investment for a home owner, it does help take some of the sting out of the cost of the project and you’ll be less likely to think that you should be recouping the full cost. After all, the improvement depreciates when you use it, right?

No matter what the cost of the project, make sure whoever you hire to do the work does a good job, as future buyers will penalize you for shoddy work. I’ve seen plenty of houses where cabinets were not hung well or tile wasn’t laid straight and grouted correctly. Buyers will look right past the improvement and think “Well that’s not done right. I’m going to need to rip that out and start again.” The cost will greatly exceed value in these cases.

When homes with recent improvements are on the market, the price negotiations are often contentious. Sellers generally feel they should get close to full value for their recent work. Buyers, on the other hand, make bids that are based on how the overall home compares to others on the market. So if you’re a potential seller, make sure you think carefully about updates before you get started because it’s unlikely you will recoup all of the cost. Feel free to reach out to a trusted real estate agent if you have questions, we see all sorts of projects and many homes in the neighborhood.