Perhaps you've heard stories about homeowners who've greatly improved their net worth by remodeling homes and selling them.
But, while remodeling can add value, there's no guarantee that a future buyer will pay you enough to recoup your investment.
Consider the example of a homeowner who lost his home in the Oakland Hills, Calif., firestorm of 1991. Rather than rebuild, this fire victim decided to buy an existing replacement home. He invested his insurance proceeds in the purchase and subsequent remodel of the property. When he decided to sell several years later, he barely recouped the money he'd invested in the renovation. He had over-improved the property for the neighborhood. Buyers weren't willing to pay more than the property was worth on the open market.
Some homeowners fall into the trap of thinking that their home is worth what they paid for it, plus the money they've invested in remodeling projects. This logic is often faulty, and can result in unwise investments.
Replacement cost value is not the same as market value. Market value is the price a ready, willing and able buyer will pay for a property. This is the only value that's relevant when you're selling your home. Replacement cost value is an important consideration when you've evaluating how much insurance coverage you'll need to replace your home if it burns down. But, it may have little bearing on the selling price of your home.
Another homeowner made the mistake of completing a major expansion and renovation of a home before doing a thorough investigation of the infrastructure. After years of living in a home that was too small and had an inefficient floor plan, the owners hired an architect to redesign the home to better suit their lifestyle.
The renovations indeed added value from a market perspective. When the owners put the home on the market, they received multiple offers. They accepted an offer at a price that more than returned the money they'd invested. However, the sellers ended up giving back a huge chunk of their profits when a termite inspection revealed that there was extensive dry rot in the internal framing.
REMODELING TIP: Before tackling a major remodel, make sure to have the property inspected by a structural pest control inspector. It's also a good idea to have an engineer look at the foundation to make sure that you're not investing good money to improve a home that's sitting on a bad foundation.
Another reason to inspect the infrastructure before remodeling is that you may be able to upgrade facilities while you're taking care of routine maintenance. Before starting an extensive remodel of the kitchen, another homeowner had a termite inspection done. The report revealed dry rot in the master bathroom.
Rather than simply repair the damage, the owners had the kitchen contractors rip out the master bath and redo it at the same time they did the kitchen job. By doing so, they reduced the cost of the bath remodel significantly. Furthermore, instead of a simple repair, the owners ended up with an entirely new bathroom that added considerably to the value of the property.
To realize the most from your remodeling efforts, stick to classic designs and finishes. Trendy designs may look outdated five or 10 years from now when you decide to sell.
Don't invest in a major renovation if you're planning on selling in the near future. It's highly likely that you won't be repaid for your investment.
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