In every community, a house will increase in value up to about 10% more than the neighborhood average. Trying to get more at sale time means your house will languish unsold. If getting 50% of the value of the improvements means the house price would be 10% above the neighborhood average, do it for your enjoyment alone. If the price tag on your project goes higher than 20% of current value, seriously think about buying a different house with everything you want in the original design, not as a tacked-on afterthought.
That house might be only a block or two away. Online, it isn’t hard to find bald-faced total lies about the return on investment for various home improvements. A few: installing a steel front door will recoup 70% of your investment and a new deck will pay back 60% at home sale time.
If everyone in the neighborhood has a deck, your house will be even-steven. It can lose value for having no deck or having a junky deck, but it can’t soar another $5,000 over the neighbors for just having a new deck. Appraisals don’t work like that.
A door is a door to an appraiser, even if it’s a spectacular door; there’s no allowance on his standard form for anything more than ‘ in great condition.’ You can get the same rating with a coat of paint, new kickplate, and new doorknob.
One of my household projects entailed replacing an awful fireplace made from adhesive-backed plastic ‘bricks’ and a plain board for a mantle with a new stone front going to the ceiling, a 5” thick solid oak mantle and a one-piece granite hearth. When it was done, as far as appraised value was concerned it was still a fireplace. My fireplace, however, wasn’t valueless.
Home improvements can be split into two types: those that increase the specs and those that reduce days-to-close.
Wow-factor improvements such as a stone fireplace, a spectacular front door, an elegant patio, big windows, California closets, or a built-in china cabinet appeal instantly to buyers. An outstanding feature or two make everyone overlook or minimize other drawbacks.
Upgrades such as adding a bathroom, bedroom or garage, finishing a basement, or installing central air conditioning become a new appraiser line item so will increase the value up to the high end of the neighborhood and then flat line.
Adding a basement bedroom or one bath may attract a different set of buyers but within that set, you’re competing with homes having that fourth bedroom or second bath as part of the original design.
Think about the competition. It might be easier to compete as a 3-bedroom with a gorgeous kitchen remodel than as a 4bedroom with one of them being damp, having a low ceiling and a cold floor. Don’t assume the improvements are like cash in the bank unless the shabbiness is sinking the value. If you’re determined to do something just before the sale, focus on improvements that reduce days-to-close. A local real estate agent can rattle these off for you in your price range. Don’t guess at them because of they’re often not what you expect.
Regional differences are significant. When you sell a house, you sell at the neighborhood average. To get buyers to pick your house out of the seven they looked at you need one to three features that are desirable but hard to find at that price range. For days-to-close improvements, the way you get your money back is in freedom to move on your schedule, without overlapping mortgages, bridge loans and tax bills for a few months or worse, putting belongings into storage and living in a motel in another city until the house sells.
Expenses related to long days-to-close can amount to thousands if not tens of thousands of dollars. Don’t discount the expenses related to inconvenience as hypothetical. They are the hidden cost of selling a home and moving. Anyone who discourages you from counting them in the metric has some financial gain angle. If you’re planning a major renovation or addition, when costs have crept up to an unintended level, pause. Put a pin in it and bring ‘buying a new house’ back on the table. If you’re contemplating an addition on a 1200 sq. ft. house to make it an 1800 sq. ft. house, just buying the 1800 sq. ft. one will leave you in better financial standing two years from now than adding on. There are exceptions. Some of those exceptions could be if the value of your land is high, if the neighboring homes are mostly 1900 sq. ft., if you just can’t sell this house, or if the prevailing interest rates are several percentage points higher than the main mortgage. If the main mortgage is fixed at 4% but the best mortgage rate today is 11%, then an additional mortgage for only the improvements is sound thinking.
The costs involved with moving are more predictable (not perfectly predictable) than the costs of an addition. People who know construction will quip “Calculate the cost of the addition, then double it.” No one says that about house-buying. The worst reason to become committed to addition is a dread of the hassle of moving. The hassle of living through a drafty, noisy, disruptive, messy construction project is usually underestimated and can be worse. If you don’t want to move because you like your neighborhood and your commute, consider becoming someone who moves only a few blocks into a house they like better. There are a lot of people who have done that; I know, I am one.
The question should be, “what’s the best way to have the desired features in my abode and be the most financially robust in two years?” The answer to that may not involve living with a tarp for a wall for three months.