Remodeling risks often outweigh returns (huh?) - Posted by Derwin

Posted by Gene on March 08, 2006 at 15:05:51:

Yea I agree…there is a big diffrence between “trashed” and just “dated”.

Remodeling risks often outweigh returns (huh?) - Posted by Derwin

Posted by Derwin on March 08, 2006 at 06:51:23:

Remodeling risks often outweigh returns

Forget about spendy improvements if you expect a fabulous return when you sell. You’re likely overestimating the payback and underestimating the costs

By Liz Pulliam Weston
MSN Money

Each spring, Remodeling magazine unveils its annual ?Cost vs. Value Report? – a survey that purports to show the payoff in various regions of 10 common renovation projects.

Each year, the report prompts journalists around the country to write about which projects are the best ?investments? for your home.

Each year, the whole cycle makes my teeth itch.

In few other contexts would we talk about something that?s nearly guaranteed to lose money as an ?investment.? Stocks and bonds, held for the long term, are investments. A new deck, a fancier kitchen or a remodeled bathroom are largely consumption.

We certainly should take the remodeling industry?s figures with a little more skepticism and note – loudly and often – that the payoff figures are based on the sale of the home within a year after the hammering ceases. How many homeowners in their right minds really want to sell so soon after a remodel, especially if they?ve endured months of noise, dust and inconvenience? Other than those who are divorcing because of the disruption, I would guess not many.

That?s not to say you shouldn?t remodel your home. A smart remodel, just like a great vacation, can have all kinds of psychic payoffs and quality-of-life benefits. Simply use a bit of common sense when you?re deciding what to do and how to pay for it.

Here are some things to think about:

Paybacks aren?t guaranteed
Certain projects, in certain hot markets, may produce a profit – in other words, you may recoup more than you spent on the remodel when it?s time to sell the house.

Truly profitable home improvements are by far the exception, according to Remodeling magazine?s 2004 Cost vs. Value report (see link under “Related Sites” in sidebar column, at left).

The average homeowner should expect to recoup no more than 80 cents on the dollar for either project, according to the report – and again, that?s if the house is sold within a year. Wait longer, and the value of your remodel drops, as tastes change and your improvements start to date.

?It?s like buying a new car,? says financial planner Mitchell Freedman of Sherman Oaks, Calif. ?As soon as you drive it off the lot, it?s worth less than what you?ve invested in it. It?s the same with improvements to property. As soon as the contractor leaves, it loses value.?

Moreover, there?s really no way to tell in advance how much value a project might add. Generally speaking, the faster home prices are rising, the bigger the payoff for remodeling. But even the hottest real estate markets can suddenly go cold. Ask anyone who lived in Seattle in the 1970s, Texas in the 1980s or Southern California in the 1990s.

That?s why Freedman and other financial planners encourage their clients to view remodeling as a spending choice, rather than as an investment on par with their retirement savings or college funds.

?It?s really a lifestyle issue,? said planner Joel Framson, an accountant in West Los Angeles. ?You have a lot of things you could do with that money, and it?s something you have to balance with your other (discretionary) spending.?

You must weigh the choices
Some families may decide, for example, that a new bathroom is worth forgoing expensive vacations for a few years. Others may discover that they value their annual trips to Disney World more than they do shiny new tile.

Investors certainly shouldn?t consider remodeling if it means tapping retirement funds, planners said, or if the project would divert money that should be going to retirement accounts or other long-term investing goals. Freedman shudders when he thinks of people who, turned off by poor stock market returns, might channel money that should go into long-term investments into their homes instead.

?I tell all my clients not to consider their homes an investment. It?s where you live,? Freedman said. ?When you factor in the cost of maintaining the house, taxes, mortgage, insurance, if it can keep pace with inflation, you?re lucky.?

Indeed, figures provided by the National Association of Realtors show American homes have appreciated an average 6.3% a year since 1968, compared with an average annual inflation rate during that period of 5.1%.

Your return on home-improvement investments
Improvement Typical cost Incr. in sale price Avg. return Agents who recommend
Lighten and brighten $86-$110 $768-$935 769% 84%
Clean & de-clutter $305-$339 $2,093-$2,378 594% 91%
Fix plumbing, electrical $338-$381 $922-$1,208 196% 63%
Landscape & trim $432-$506 $1,594-$1,839 266% 72%
Staging $812-$1,089 $2,275-$2,841 169% 76%
Kitchen, bath upgrades $1,546-$2,120 $3,823-$4,885 138% 83%
Repair flooring $1,531-$1,714 $2,267-$2,589 50% 62%
Paint exterior walls $2,188-$2,381 $2,907-$3,233 34% 57%
Replace carpeting $2,602-$2,765 $3,585-$3,900 39% 65%

HomeGain’s Home Sale Maximizer, an online calculator based on a survey of 2,000 real estate agents nationwide, indicates that moderately priced home improvements, ranging in cost from $80 to $2,800, that are made immediately before a home’s sale actually yield the highest returns.

Choosing the right project
All that said, people who want to remodel would be smart to at least consider the potential payoff of their improvements before they begin. Like a car with good resale value, a home improvement project with some chance of a return is usually better than one that won?t add much value in buyers? eyes – or, worse yet, that could detract from the potential sale price.

Pools and spas are a losing proposition in many parts of the country, for example. The required maintenance and potential danger turn off many buyers, especially those with young children, real estate agents say. Adding a home office doesn?t seem to have much payoff either, returning as little as 26 cents on the dollar in some markets, according to the Remodeling survey.

Of course, if you really want that pool or state-of-the-art office, and you?re planning to live in your home for many years, the resale value might not matter much to you. But if, like most homeowners, you?ll be in your house for seven years or less, you might be wise to shelve your plans until you buy your ultimate dream home.

A better bet for a remodeling project would be any improvement or addition that brings your home up to the average for your neighborhood, said appraiser Diana Jacob, director of education for the National Association of Master Appraisers in San Antonio, Texas. If you have a two-bedroom home in a neighborhood where three is the norm, for example, a bedroom addition can make sense. Likewise, if your area is gentrifying, replacing your Kenmore appliances with Viking may not be overly indulgent – as long as you see plenty of these higher-end stoves at your neighbors? open houses.

If your home is already the envy of the neighborhood, however, you?re unlikely to get back much if anything on further improvements. Homes that are worth more than 120% of the neighborhood average typically don?t benefit much from renovations, appraisers say.

Think about improving your home’s energy efficiency, as well. More efficient appliances, windows and light fixtures can pay for themselves within a relatively short time. So even if they don’t add much to your home’s resale value, you’ll probably recoup your cost before you even put the house on the market.

Homeowners also shouldn?t neglect their homes? innards in their rush to improve its appearance. Major systems such as wiring and plumbing typically need updating after 20 years or so, as do many roofs and windows, Jacob said. Money spent upgrading these components might not offer a dollar-for-dollar return at sale time, but neglect and deferred maintenance can detract from a home?s potential sale price and add to the time it spends on the market.

Paying the smart way
In an ideal world, planners said, homeowners would pay cash for all their remodeling projects. That?s because consumers generally should borrow money only for items that are likely to appreciate – and remodels typically don?t qualify. Paying cash also can encourage homeowners to contain costs and resist the urge to add unnecessary frills.

Major remodels, however, typically require more cash than most homeowners have on hand. In these cases, planners say it can be okay to use a home equity loan or home equity line of credit – with moderation. Interest on such loans is tax-deductible, as long as the amount borrowed is less than $100,000.

Including their mortgages, said planner Michael Eisenberg of West Los Angeles, homeowners should limit their borrowing to 75% to 80% of their home?s value. That means that if your equity in the home is less than 20%, you should put off the remodel until you?ve paid down the mortgage or until home values appreciate further in your area.

Once you?ve taken out the loan, he advises, always make more than the minimum payments and strive to pay the loan back as quickly as possible. If you can?t make more than the projected minimum payments, the project isn?t affordable.

?You may have to tap into your equity again in an emergency,? said Eisenberg, an accountant and PFS, ?and you want to build it back up so it?s there for you.?

Re: Remodeling risks often outweigh returns (huh?) - Posted by Joe

Posted by Joe on March 08, 2006 at 14:05:37:

I saw this article or a similar one a couple weeks back. It confused me as well. But then I realized that I think they are talking about someone just renovating their already-liveable home. If you pickup a rehab that looks like a junkyard inside with stains, rips, tears, holes, leaks, etc. Then you get a massive return on your investment by fixing the little things because you are bringing it from a 2 to a 8 (on a 1 to 10 scale). This article is talking about bringing things from a 6 to an 8.