How To Add Value To Your Home: The Remodeling Quandary

This is a guest post by Libby Balke, head staff writer for Smart Money Focus. There she writes about finances and family life as a full-time online entrepreneur. If you enjoy this article, feel free to jump over to Smart Money Focus and check it out.

It’s most likely the single largest purchase – and probably the biggest investment – you’ll ever make: your house. Thanks to the recession, homeowners are holding on to their properties longer than ever. Between 2001 and 2008, homeowners remained in their house for an average of six years before selling; last year, that length of time had ballooned by 50 percent up to nine years. And what are these same homeowners looking for when they ultimately do sell? I can sum it up in two words: bigger and better.

That’s where renovating comes in. Whether you want to add value to your home in hopes of selling it down the road for a higher price, or you just want to give your family more – or nicer – usable space, remodeling can help you reach your goals. But it doesn’t always make sense. Here are three rules you have to read before picking up a hammer:

Create Your Real Estate Road Map

How much longer do you plan to stay in your home? If the answer is less than five years, you may want to reconsider taking on serious house improvements. The average bathroom remodel cost $16,552 in 2011, while a new kitchen cost an average of $19,588 for even a minor remodeling project. Say you paid for these two projects in cash – and if you did, please call me, because I’d like to take out a personal loan at zero percent interest from you. You’re talking a grand total of $36,140. Divide that over five years – it comes out to nearly $20 a day! Is a new kitchen really worth $140 a week?

Price Your Neighborhood

There’s an old adage that you never want to be the highest priced house in the neighborhood. Why? Because these homes are far less likely to sell for their full real estate value. Adding on additional square footage or updating your kitchen and bath are not how to add value to your home if your home’s value – based on the worth of your neighbors’ properties – is already maxed out. Instead, strive to have a housing value between the 25th and 75th percentiles in your neighborhood to maximize your resale value.

Getting Your Money Back

Many novice remodelers think they’re adding value to their home when they update a bathroom or finish their basement, and they are: just not as much value as they think. Take, for example, the average cost to turn an unfinished walk-up attic into a bedroom. While you’ll likely spend about $50,000 to complete the project, you’ll see only a fraction of that – 72 percent, on average – in resale. And that’s on the high end: according to Remodeling.com, most house improvements see an average return between 45 and 75 percent, with home office remodels giving owners the lowest return at just 42 percent.

Lessons Learned The Hard Way

What gives me the authority to spout off about the cost effectiveness of a pricy remodeling job? I’m not a realtor, nor am I a contractor: rather, I’m an average consumer – just like you – who learned this lesson the hard way.

Four years ago, my husband and I decided to add a four-seasons room on to our house; in reality, it was a glorified sunroom, but since the addition would be fully heated and have electricity, we would ultimately be able to count it in our home’s overall square footage. We’d been in the house two years at the time, and thought we planned to stay there long term. So, we plunked down $18,000 to pay for our addition.

Fast forward to today, and we’re trying to sell our home – turns out, the extra 140 square feet afforded by our sunroom addition wasn’t enough to offset the addition of two children during the intervening years. Although we paid $18,000 for the extra space, our tax value only went up $11,000. That’s a 61 percent return on our investment – and we’re the lucky ones. The average sunroom addition only sees a 46 percent return.

My husband and I broke the first and third rules of renovating: we thought an addition was the epitome of how to add value to your home. We learned the tough way that, unless you plan to stay in your home long term, it’s a financial decision that doesn’t always pay off.