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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
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