search by       project

search by        region


2001 Report: Cost vs. Value

What will a remodeling project add to the value of your client's home?

By Jim Cory

Realtor Tom Lombardi sells singles, row houses, and twins in Philadelphia's Mayfair section. A few months ago he sold a house because the owners had remodeled the kitchen three years before. The new appliances, Corian countertops, and flooring projected a kind of "inside-out" curb appeal to the buyers, a young married couple.

Along with comfort, convenience, and aesthetic satisfaction, one of the main reasons people remodel their homes is to increase the value of the property. Sometimes the value goes up by as much as the cost of the remodel, and sometimes by even more, depending on where the house is, what shape it's in, and the quality of the work.

The REMODELING Cost vs. Value Report compares the estimated cost of a professional renovation or other improvement with the value it's likely to add to the home. Here's an example: HomeTech, the estimating software publisher that generates the cost estimates given here, says painting, changing or refinishing surfaces, and replacing the oven, range, sink, and faucet--a basic kitchen facelift--costs a little more than $16,000 in Seattle. Real estate agents interviewed there suggest that if the house were sold a year later, that $16,000 remodel would add $19,500 to the price tag, a 121 percent return on investment.

This year's study includes cost and value figures for 10 popular remodeling projects in 60 markets. Of all projects included, the minor kitchen remodel would likely contribute most to home value, returning a national average of 88 percent of cost. The home office, which seems to lack universal appeal, yields the least return--55 percent nationally.

Fickle figures

Like real estate itself, the value remodeling adds to a home is very much a local game. Demand for homes enhances the value of improvements already made. Up markets--such as New York's wealthy suburbs in Westchester County and Long Island--yield the highest returns in the region.

In the San Francisco area, almost every project we cover pays for itself and then some. The excellent return on even a home office, which San Francisco real estate agents estimate would recoup 110 percent of a $12,686 investment, is a result of rapidly rising home values: 20.7 percent in San Francisco last year, 22 percent in Oakland, across the Bay.

At the other end of the state--in San Diego--a similar escalation produces like returns on remodeling. Real estate agents there estimate a no-frills bathroom remodel costing $10,729 would add $12,160 to the value of a home, a 113 percent return. Home values in the central San Diego area have climbed an average of 6 percent per year in the 23 years real estate agent Ginny Ollis has been selling there. California real estate, says Ollis, is "a different kind of commodity than it would be in Iowa," where, she guesses, sellers would be lucky to make enough on 10 years appreciation to pay the closing costs on their next house.

In fact, that same low budget bathroom remodel would cost $9,235--close to the national average of $9,455--in Des Moines. But real estate agents there say it would add far less value to the home: $6,080, a 66 percent return.

Instant equity

In a poll published last November, three out of four REMODELING readers said clients tell them earning a return is not their No. 1 priority. Most clients remodel because they want to or need to. A return, like rising home values, is often a function of the market.

For example, in affluent Bucks County, Pa., north of Philadelphia, contractor Joseph Billingham, owner of Billingham Built, builds mostly kitchens, baths, master suites, and additions. He always asks clients how long they plan to stay in their home. "Long term," is the usual answer. But with land scarce and Bucks County a coveted place to live, "anything you do you're going to get 100 percent of the value back."

The projects he focuses on, Billingham says, have a different kind of appeal to buyers than cut grass or fresh paint. Kitchen and bath remodels, room additions, and master suites make their own kind of statement. "It says, 'I, as an owner, valued this house and kept it up to date,'" he says. "It shows the potential buyer that you cared about the house."

As commutes have lengthened in most metro areas around the country, many people want to be in first- and second-belt suburbs. Houses in those neighborhoods are older, often smaller. So when clients ask Charlotte, N.C., remodeler David Tyson if they're going to get their money back on the project he proposes to build, he tells them it's all relative, depending on what they want and what they're willing to pay. If it's adding square footage in first-belt Charlotte suburbs, they almost can't lose. "We can put an addition on for $200 a square foot, but the selling prices in the neighborhood might be $250 or $300 a square foot," Tyson says. "So they've bought instant equity."

Home market holding up

Remodeling will continue to add value to homes as long as the market for resales stays strong. Historically, home sales, like new construction, nose dive at the first hint of recession. Not so this year says Kevin Roth, senior economist for the National Association of Realtors. He expects about 5.1 million existing homes to change hands in 2001. That would make it the second highest year on record, after 1999. Roth says low mortgage interest rates and relatively low unemployment drive sales. The NAR expects existing home sales of 5.18 million for 2002, which means demand will stay strong.

"The market's moving very fast," says Lombardi. "Many of our homes are selling at above market price." Minneapolis real estate agent Cindy Cadwallader of Cadwallader Realty says Minneapolis prices have risen 12 percent in the past year, with particularly high demand for starter homes. "We're seeing multiple offers on properties. That's what's driving up prices as much as anything."

According to NAR figures, home prices in June were up 8.8 percent over the previous year. Price increases favor remodeling, Roth says, because "if you like the place you live, this may be the time to reinvest the equity you've gained back into the property, with a new kitchen or bathroom."

Why Remodel?

How often does a dated bath or kitchen drive home buyers away? Often enough, say real estate agents.

Real estate agents say even the least experienced home buyers pay attention to three features: the roof, mechanical systems, and the kitchen. Try selling a house with a seriously dated kitchen or bathroom and two things happen, according to Philadelphia real estate agent Tom Lombardi: The house stays on the market longer, and you get less money for it than you would for other houses in the same neighborhood. Often a lot less.

"Ninety percent of the people who look at that will be discouraged from buying it," Lombardi says, "because they see a cost there." In his experience, buyers seeking a fixer-upper are few. Most want everything finished.

The price of not remodeling

On the West coast, Ginny Ollis says sales of homes "in prime condition" in the area where she works, San Diego, generally go for anywhere between $400 and $440 per square foot. If the kitchen and bathrooms need renovation, she says, you can drop that to $350 per square foot.

"We get a little better return on remodeling here, because our prices are high," Ollis says. In fact, she points out, prices rose an average of 6 percent per year in the 23 years she's sold homes in the area. The steady rise in home values, she says, means remodeling--be it a kitchen remodel or family room addition--"almost always pays off."

Jack Sartore of Adams & Meyers Realtors, in the second-belt Chicago suburb of Hinsdale, says a shabby or dated kitchen can add as much as 45 days to market time. "Unless the location is superb and people can look past that. In that case, they'll think, this is where I want to be and I'll do the kitchen and I don't care."

Sartore estimates about one-quarter of the prospective buyers he sees are willing to purchase a house that needs serious remodeling. The rest want something up-to-date, especially those moving into the area from out of town.

How much of a discount will buyers demand? Jacksonville, Fla., remodeler Larry Murr is often contacted by potential buyers who want a bid on what a new kitchen or bath would cost. They use his bid as a bargaining chip in negotiations with sellers.

Fear of inconvenience

The biggest fear people have about buying a house that needs work, however, is not the expense. Many sellers of such homes are willing to come down on price. Nor is it the reluctance to go out and find a remodeler, because some real estate agents--though not all--will suggest a contractor, or several, who can be relied on to perform the renovations and deliver quality work.

The real fear, Sartore says, is the inconvenience of living through a major remodel, especially after the hassles of moving. "They have no time to hire contractors or make all these decisions," says Joyce Svendson of Svendson & Co. Real Estate, in New Jersey.

In the experience of Albany real estate agent Walter Kresge, most prospective buyers will "go out and buy a new house before they'll want to tackle renovation."

In these days of crawling traffic and lengthy commutes, the amount of time it takes a potential buyer to get to work can be a big factor in deciding on a house. In some markets, location overrides condition.

Long Island real estate agent John Patula says roughly half his prospects buy a house intending to sink money into major renovations. He often sees homes in Garden City, N.Y., being sold by empty nesters who've lived in the community for 20 or 30 years. In such cases buyers are "going in and basically gutting the house," says Patula. "The rest are doing bathrooms or kitchens or just putting additions on." Tear-downs, says Patula, are common in the Long Island community of Garden City, a 30-minute train ride from Manhattan.

"We just sold a ranch on a slab, with no basement, two weeks ago. The buyer paid $625,000, and another $25,000 to demolish it, so he has $650,000 into the land," he says. "And (building) the house will be another $600,000."

Heavy demand sometimes leaves buyers little choice. In Minneapolis, where entry-level houses are hot, buyers distaste for a dated kitchen or bath is overridden by their fear of not finding anything to buy. "If the location is what they're looking for and the square footage is what they want, in this market, they'll take it," says Cindy Cadwallader of Cadwallader Realty. "They think, we can take care of this somewhere down the road."

Thank you

Cost estimates for all projects were provided by HomeTech, Bethesda, Md., a publisher of estimating and management information for professional remodelers.

The following four remodelers suggested design and construction tips to consider when renovating with resale in mind:

N. Claibourne Porter Jr., AIA. CGR, CKD, CR, NCP Construction. Anchorage, Alaska

Ken Moeslein, Swing Line Windows, Pittsburgh

Alan Freysinger, Design Group Three, Milwaukee

Judy Kurtz, CKA, Sylvestre Construction, Minneapolis