When Home Improvement is a Bad Thing
We talk a lot about adding value or equity to your home. After all, your home is a significant investment and one that you hope will grow over time. Getting a reasonable return on that investment takes time and careful consideration of a number of factors. Updating an old kitchen, renovating a bathroom, adding a room or even a second story to an existing home can all be worthwhile provided you don’t invest more money into your home than it is worth.
A little history lesson
Home prices have fluctuated greatly over the last ten years. The economic recovery has restored many communities to, or near, pre-recession levels. But, as anyone who found themselves underwater – that is owing more than their home was worth – will tell you, slow and steady wins the race. In other words gaining the kind of market value that was possible in the hyper inflated conditions we saw prior to the recession carries great risk. Those who bought as prices peaked because they believed home values would continue to rise, found themselves in a very difficult situation. A similar thing can happen when you spend too much on home improvements that you can’t recoup when your sell.
If you plan on retiring in your home, you can pretty much make as many home improvements as you desire. But if you’re like the average person who moves every seven years, you may want to hold off or at least think twice. Here are somethings to keep in mind before you make improvements to add to your home’s value:
It’s really all about the comps.
Your home is valued based on its assessed value and its comparable value in relation to other similar homes in your neighborhood. This means square footage, property size, and the number of bathrooms. That’s pretty much it.
What type of market are you selling into? Is it a buyer’s or a seller’s market? If the inventory of available homes is limited you may get that asking price, but if there are many homes for sale, you’re looking at a more competitive market. While a renovated kitchen may be the thing that closes the sale, will the price the buyer pays cover the cost of that upgrade?
Also, are there greater economic conditions affecting your neighborhood and state? Economic conditions impact markets, sometimes severely. A sudden layoff at a local business, overbuilding, low consumer confidence and rising interest rates can all make it more difficult to sell your home.
Moderate improvements are must. Properly maintaining a home is one of the best ways to ensure a good selling price. While granite countertops may be desirable, even expected these days, they should not be installed at the expense of a new roof, replacing an old or inefficient furnace, or replacing drafty energy inefficient windows.
The best improvements are sometimes the cheapest. Prior to selling, a fresh coat of paint may be just the right touch to get a customer to buy. The key is to avoid improvements beyond what the neighborhood market value for your home dictates.
- Check realtor listing for how many unsold home there are in the neighborhood.
- Check to see how selling prices compare to listing prices, and listing prices to assessments.
How fast are homes selling, and how long similar homes have been on the market can tell you a lot about how much you should invest in home improvements. Bottom line, if you make well considered improvements that are right for your home’s style and the neighborhood it’s in, you can’t go too far wrong.
