Creating Value

gt4674b

The thread on rentals homes got me thinking. Is it truly possible to create value through renovations?

Realtor Magazine and Remodeling Magazine team up annually to prepare the "Cost vs. Value Report". The top 10 remodeling projects and % return on cost once the home is actually sold are below:

#1 Minor Kitchen Remodeling - 88%
#2 Bathroom Remodeling - 85%

#3 Major Kitchen Remodeling - 81%

#4 Family Room Addition - 80%

#5 Deck Addition - 77%

#6 Master Suite - 75%

#7 Attic Bedroom
#8 Siding Replacement - 73%

#9 Window Replacement - 69%

#10 Home Office - 55%


So let's assume these values are relatively accurate. Remodeling projects, on a whole, do not create value for the homeowner in a strictly financial sense. There is certainly value to the HO in the pleasure they derive from the project, but what I want to discuss is cold hard dollars.


Of course all this makes perfect sense from a rational point of view. Take two houses in the same neighborhood right next to each other and both are for sale. One is in good condition and the other is a s***-hole. Comparable sales will give you a base-line for how much a house in that neighborhood is worth. Couple A buys the nice house and they should expect to pay a reasonable comp rate for that house. Couple B buys the nasty house. Will they pay the same rate? Of course not. They will pay a rate based on what it will take to return that house to an average condition for the neighborhood. Only a fool would pay a dollar more.



Its the same everywhere. Houses that are nicer get a slight boost in comp rate, houses that are worse get a slight decrease in comp rate. Presumably, the nice house had some money invested in it over time and the worse house was neglected and will require some repair.

So the question remains. Can value be created? Any increase in spending on the house should be reflected in the price of the house. If the study above is to be believed, the increase in sales price in not even commensurate to the money invested (i.e. a negative ROI!).


I would love to hear your suggestions on how one can truly increase the value of a home. Here's to a good debate!


PS - To search for the latest report - Google cost vs. value report- it comes as a pdf, about 5 down when I search from marealtor.com

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