Home Renovations and their actual Return on Investment
Surprise, it's not what you think.
Home improvements like kitchen remodels, bathroom renovations and other projects are things every homeowner considers from time to time. Unfortunately, many renovations cost more that they return in actual value. Professional Realtors are often tasked with home values and are a great resource to help you avoid the remodel money pit.
With the focus on home value in mind, let's cover some of the basics that affect a homes value. Clutter and Repairs
It is pretty obvious that an overgrown landscape and decrepit playsets hide and distract the consumer from the beneficial features of a home. Cluttered interiors go beyond what hides in the closets to include an overabundance or artwork or oversized furnishings. Properly staged homes have been cleaned and decluttered inside and out for a reason; it increases perceived value.
Fixing a leaking roof, finicky plumbing or dead light fixtures all fall into the repair category; and all unaddressed repairs will hinder value (not to mention the quality of home life). In a sales transaction, needed repairs surface early in the escrow process after the potential buyer pays for a professional inspection. The needed repairs discovered are requested to be corrected by the seller or credited in a dollar value. Refusing repairs could kill a deal.
Because clutter and overdue repairs will almost always hurt the value of a home, we will focus on renovations as investments like a bathroom remodel, or adding solar to a home, and how these improvements equate to a positive increase in home value.
Return on Investment (ROI)
This topic of return on investment in regard to real estate renovations is widely speculative. There are material choices that sway costs, size and scope of a job, regional variables to how tradespeople are compensated and of course, opinions. Luckily there is ample data on costs and values of many common renovations. Let’s review some renovation examples for a common home.
Flagstone path, stone planters, five flowering shrubs, one deciduous 15-foot tree and landscaping bark.
Average Cost: $4,750
Source: Nat. Assoc. of Realtors 2016 Remodeling Report
Minor Kitchen Remodel
New cabinet fronts and hardware, new appliances, new counter top and sink, new flooring.
Average Cost: $24,957
Refinish Hardwood Floors
Removing carpet and refinishing hardwoods are very common moves to modernize and restore a property.
Average Cost: $3,000 Return: $3,000 ROI:100%
Source: Nat. Assoc. of Realtors Remodeling Report
Exterior Home Paint:
Average Cost: $2,575
Note: as mentioned before, if a home has aged, cracked and peeling paint, you should paint. The low cost or new paint will return in value over damaged paint.
Source: Zillow Paint Colors and House Values
An existing 5 x 7 foot bathroom gets all new fixtures, porcelain on steel tub, ceramic tile surround, new toilet, vanity sink, ceramic tile floor and medicine cabinet.
Average Cost: $22,310
Source: 2017 Cost vs Value
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Costs of Renovation
While many of the improvements or renovations depicted in the reports cited do not show a positive return on investment, it does not mean that there isn’t value to be had. The rabid flippers in Southern California are proof that there are profits in renovation.
The three most impactful ways to cut costs are: 1) Doing as much labor on your own; 2) researching and shopping materials yourself; and most importantly 3) shopping your contractors. Contractor pricing varies. One roofer may quote $21,000 while another quotes $9,000 for the same house proving materials and quality of work will vary wildly. Your best bet is to start making a list of contractors and get four to five quotes. In addition to the quotes, ask for references from each contractor and contact those references. You will be glad you did.
Recommendations from friends and neighbors combined with review sites like Yelp and HomeAdvisor help build out that list. Through 40 years of helping homeowners, Podley Properties, the brokerage I work for, has amassed quite a list as well. You can access our known recommended contractors here: Contractor Directory
You can then use the data from these reports to set your budgets to ensure that you can create ROI from the upgrades to your home.
Marble tile for a renovation will cover a floor just like ceramic tile will but at triple the cost. With ROI in mind for a single family two- to three-bedroom Bungalow Heaven Pasadena home, choosing marble, or anything on the high end of the material spectrum will generally not yield a positive return on investment. Going to the low end of the spectrum, like a mass-produced ceramic tile should also be avoided, the average selling price of the neighborhood is not going to draw the budget buyer. The key is to find the mid-range in materials like a porcelain, slate or granite tile. Staying period-correct with linoleum could also be an interesting solution for areas like the kitchen and mudrooms.
Using the mid-range methodology for all materials, fixtures, appliances will give you better chances of seeing a positive return.
Pricing a Home’s Value
When pricing a home to go to the open market, a realtor will pull comparable sales in the neighborhood. Comparing a 1,300 –square foot, 3 bedroom/2 bath home that has a remodeled kitchen to one in the same neighborhood that has a 1970’s kitchen will undoubtedly show a value difference. But it is nearly impossible to find comparables that have only one improvement difference, especially in Bungalow Heaven where every home is unique in its own right.
There is a however a general sense of Price per Square Foot (or PPSF), in particular when compared to houses of similar specs (square footage, bed/bath count, lot size). For example, you may see differences from $500 PPSF to $550 PPSF, with the difference being the renovations and details of the home. While this seems like a nominal difference it equates to a $75,000 price increase on a 1,500-square foot home. Appraisers generally default to PPSF of sold comparables to determine a home’s value, then they will adjust for specific features included or not included. Renovations will undoubtedly increase the appraised price.
While solar can seem a very expensive option for improvement, there are some nuances that may make it a viable improvement with a positive return. Tesla Energy (formerly Solar City) has a staff of full time roofing contractors. If your home is in need of a roof for repair, their cost of doing the repair is generally 50% of what a standard roofing contractor would charge. Naturally, you have to buy a solar system from them, but the monthly payment for the system and the roof repair is generally at or just under what your normally pay for electrical utility. A solar equipped home will have a higher PPSF.
If you are considering solar and need a new roof, I recommend you investigate with Tesla Energy directly. You will be surprised at the potential savings and benefits from their program. I am taking a closer look at solar through my contacts at Tesla Energy so stay tuned to my blog and social media channels for the full story.
Specific Property Reports
As a realtor, I can generate a custom comparative market analysis for your property. Together we look at all the sold comps in the neighborhood and add or subtract for renovations to come up with your homes current or even projected value. It is a handy tool and easy to produce. Just contact me and we can begin as soon as you are ready.
Home renovations can be very challenging but armed with the data, you can make it profitable for when it comes time to sell.
Michael Robleto is a REALTOR® with Compass. His analytical and open approach to helping people has served his clients well in his twenty years of sales experience. Michael brings a modern data and technology-driven approach to real estate while focusing on the historic architecture of Pasadena's historic neighborhoods like Bungalow Heaven. Tapping his experience in media and journalism, he publishes in-depth blog articles that will be of interest to homeowners and home-buyers. He can be found on Facebook, YouTube, Twitter and Instagram under the common profile name of his blog BungalowAgent or at www.BunaglowAgent.com/blog. For Sellers or Buyers Agent representation he can be contacted directly.