Home-flippers beware: This article isn't for you.
We’ve tracked the Cost vs. Value payback ratios for groups of related remodeling projects dating back as far as our 2003 report. They show that, unlike with replacement jobs such as switching out a steel door, there’s not a single project on a national basis that returns more money in home resale value than it costs to hire a pro to do the work.
Kitchen projects have hovered for the last half-dozen years in the 60% to 80% payback range. Bath projects are around 50% to 60%, while room additions have been hovering between 50% and 70%.
What these projects have in common is that they’re among the most expensive that the Cost vs. Value Report tracks. Upscale kitchen remodels, two-story additions, and both midrange and upscale master suites are priced this year at between $111,000 and $236,000.
Meanwhile, siding and window jobs have tended to do better, over the year, hovering closer to 75% in both cases. That’s in part because they’re cheaper to execute, and thus there’s less labor in the total cost. The average national price for siding work is around $12,000 to $14,000, while midrange window replacement jobs range around $11,000.
Given that the big-ticket jobs return at resale only 50% to 75% of their cost, it’s no surprise that many home-flippers avoid doing these projects and instead focus on inexpensive jobs, such as painting walls or installing carpet, which can make a home look better than it really is, or buy cheaper products than many pro remodelers would use in their work.
These numbers also are likely to shock and disappoint potential clients who watch TV shows where—thanks often to manufacturers’ willingness to provide free products—total construction costs are laughingly low and the payback at resale always seems to top 100%.
So, are these bad numbers? No, and for two reasons.
First, these charts will give your dreamier customers a much-needed dose of reality. Use Cost vs. Value’s long-term track record to back you up when you explain to them what it really costs to do a project and what Realtors think the financial benefit from that remodeling job will be.
The second reason why these tables deliver value is that they can help you guide clients into a deeper discussion about their lifestyle and long-term goals for the house. In essence, the longer the prospective clients plan to remain in their home once the work is done—say, at least five years—the more that you and they should focus on the cost part of Cost vs. Value and the less they should think about the job’s resale value.
After all, the value of a remodeling project at resale is always subject to factors that are difficult to predict. Changing how a space is used may meet the immediate needs of the current homeowner, but may be at odds with what prospective buyers are looking for.
Converting a small bedroom into a grand master bath, for example, may be perceived by a prospective buyer as the loss of a bedroom rather than the gain of a luxury bathroom. A home-office remodel may appeal to buyers who intend to telecommute or run a home-based business, but will have little value to other buyers who would prefer to have an extra bedroom or an exercise room.
Similarly, adding square footage may solve immediate space needs, but it also adds to maintenance costs. Additions may also affect energy costs, although current codes ensure that most additions will perform as well as or better than the rest of the existing house.
And remodeling projects are often seen as an opportunity to upgrade energy efficiency through air sealing, adding insulation, more efficient lighting and HVAC equipment, and other measures. These may have a positive effect on value in this era of heightened awareness about energy use.
“I often find myself surprised by how little the typical salesperson knows about the person he is selling to,” Remodeling consultant Paul Winans says. “I would usually ask a potential client what he did, not necessarily for a living but more about what he did with his life, in general. Why? The answers would help me shape my approach to selling to him.”
Location, Location, Location
You can also point out to homeowners that how the value of a remodeling project is perceived depends on a variety of factors that traditionally affect home values.
These include the condition of the rest of the house, the value of comparable homes nearby, and the rate at which property values in the surrounding area are fluctuating. If you work in Florida, Nevada, California, Arizona, or other states where there have been huge numbers of foreclosed properties, it’s likely that a project’s value still is being colored by that lingering problem.
The Cost vs. Value Report provides an accurate snapshot of the national housing market, but it cannot be applied accurately to an individual remodeling project for a particular home at a particular street address. That’s where working with an experienced local Realtor could help you make the deal now—and alert the Realtor to a prospective customer tomorrow.