Cost vs Value: Should We Improve Our Home?

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Cost vs Value: Should We Improve the Home?

The question of “Should we improve our home?” is one that all homeowners ask themselves when they contemplate a home improvement whether it is large or small. The question is a many faceted one ranging from physical need, our family is bigger, to simply how it makes them feel about their home. Whether it will “pay for itself” in realized gain in the home sales price is often automatically answered “yes”. To cite examples that most REALTOR and their clients can relate to is when the REALTOR asks the homeowner about their asking price. Realtor, “Mr. Homeowner, may I ask, how did you arrive at that asking price”? Homeowner, “Simple, I paid X for the home, then I made all these improvements that cost Y, also I have to the pay commission Z. So, I added,  X+Y+Z = (asking price). While the homeowner’s numbers may all be real, they are usually wrong in providing a valid number for the value of his home. A big reason is the homeowner assigning full value to the improvements  made to his home. That is, he believes that a dollar spent on his home improvement project automatically translates into a dollar (or more) in home value. Unfortunately, this is often not the case.

Home improvements are made for many reasons. One of the best reasons is to improve functionality for the family living in the home. When this is the reason, the homeowner extracts value from the home on an ongoing basis while living in the home. The sad fact however is, that the cost of most home improvements are only partially realized in adding  “selling value” to the home. To quantify this, REALTORS have helped develop the cost-value ratio. The cost-value ratio expresses the resale value as a percentage of the construction cost. When cost and value are equal, the ratio is 1 or 100%. When cost is higher, the ratio is less than 100%. When realized value is higher than cost, the ratio exceeds 100%.  The realized value for any given home improvement project can vary widely depending upon the project and the geographic location (state and city) of the home.  Only one of the twenty tracked projects, replacement steel entry door, created more value than it cost in all geographic regions and cities. All other projects returned less value than they cost in at least some areas and certain projects were down across the board. While it can be hard to imagine, many projects actually subtracted from perceived value while costing real dollars. The poorest return on the 2015 list…Standby electric generators. Even so, they can be perceived as value adders in some special situations.

Sorting through the cost vs value question can be a daunting task. Fortunately, help is available only a few clicks away at WWW.remodeling.hw.net and click on cost vs value or in this year’s April issue of Remodeling Magazine.

One aspect determining whether the cost-value ratio is high or low covered in this year’s report is how it can depend upon the housing market direction, i.e. is the market going up, down or sideways. In pre boom years, the overall cost-value ratio was 82.5%. As the housing boom produced a glut of housing, the index fell to 70.1%. Then we had the housing bubble bust. Even though project cost sank about 10% in 2010 and kept going down the next two years another 8%, the value returned fell even more pushing the overall cost-value index down further to 70.1%. As the housing market has recovered in general, the cost-value ratio has done better in some areas than others and in some price segments than others. We find homes priced near the local market’s median level are experiencing gains in project value, while for homes priced well above that level, project cost-value ratios are stuck at lower and even negative return levels. So, one might do well in replacing a front door on the three bedroom ranch home, but the homeowner of the $1MM golf front home should think hard about a major kitchen renovation.

Submitted by Phil Hinesley, PhD, GRI, RSPS of Chanticleer Properties, LLC  on behalf of the Public Relations Committee of the Pinehurst-Southern Pines Area ASSOCIATION OF REALTORS.