Smart Buying
Remodeling That Makes Sense
The price of materials is rising, so pick your project carefully.
From Kiplinger's Personal Finance magazine, November 2005
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Short of a killer-force hurricane blowing your house away, it's hard to imagine a worse experience as a homeowner than tackling a big remodeling project. So why do we do it? You could credit all that home equity sloshing around, which qualifies us for cheap construction loans. Or the joy we get in investing in a fast-appreciating asset. Or maybe it's because of Ty Pennington, the genial host of Extreme Makeover: Home Edition, who seduces us into believing it will be easy.
It's not easy. And both the hurricane fallout and a possible slowdown in home-price appreciation make it even more important that your remodeling project be the right one -- that is, if one of your goals is to increase your home's value.
Storm damage is adding to the already strong demand for construction labor and supplies. Michael Carliner, an economist with the National Association of Home Builders, says that plywood, asphalt roofing shingles and possibly lumber will climb in price. "This is probably not the easiest or least-expensive time to get remodeling done," he warns. And if home-price appreciation slows, as many forecasters expect, you won't be able to count on a buyer down the road to pay the bill for a misguided project.
Payback time
You need to recognize at the outset that few projects pay for themselves when it comes time to sell. The average payback, reports Remodeling magazine, has ranged between 79% and 86% in recent years. The best returns come from redone bathrooms and kitchens, which recover 90% to 93% of costs. A couple of exceptions apply. When home prices rise rapidly, well-done projects often pay for themselves immediately, says Sal Alfano, editorial director of Remodeling. A project might also return more than 100% if it involves bringing a house up to the standards of the neighborhood, he says.
Big paybacks come from remedying deficiencies that will cause many buyers to skip your house. As examples, Alfano cites adding a deck to a home in a neighborhood where decks are common, and building a second full bathroom.
One of the best ways to spend your remodeling dollars is to rehab your old home into your dream house. You'll avoid paying what may be an inflated price for a new home, and you won't have to give up your old neighborhood -- the friends, the schools and the great commute.
It was the inflated Southern California housing market that drove Ali and Mack Schreiber into a whole-house makeover. Their Fallbrook, Cal., home, built in 1977, was too small for a family with a 4-year-old and a 2-year-old -- not to mention two dogs. Before selling, they would have had to redo the worn-out kitchen.
Ali, 40, says they actually made an offer on another home with a bigger lot. "But it needed the exact same things as our house. So we thought, Why don't we just stay here and make it what we want?" When the sellers turned down their offer, the Schreibers were relieved. "Why spend $500,000 on a house that you have to upgrade?" Ali asks.
Instead, last May they hired Robert Edgecomb, owner of a DreamMaker Bath & Kitchen franchise, to do a $300,000 overhaul of their home. At the time, the house was appraised for about $500,000 -- more than three times the price they had paid for the place back in 1997, giving them plenty of equity to borrow against.
The house is getting a complete makeover. The outside will have a dramatic face-lift, with stucco replacing deteriorated wood siding. A new driveway will lead to a relocated garage. Interior upgrades will include a new kitchen and master bedroom, and a bathroom with what Ali calls "the biggest, baddest jet tub on the market." When the dust clears, the Schreibers think their home's value will be in line with new, $800,000 homes for sale in the area.