Monday, September 23, 2013

Five Steps to Optimize Your Home's Resale Value - Don't Over-Improve

While we interior design bloggers love the decorating and creative projects in our homes, it's still important to know where we stand financially.  Your home is likely to be your biggest purchase and can really effect your quality of life.  With people moving an average of every five to seven years, we want to make sure we're  getting the most out of our real estate investment.  This will effect how much we can spend on our next home and how we'll plan for our eventual retirement.

These reasons are why it is so important to get the most out of our home's resale value.  We should take care not to over-improve our home for our neighborhood. It's so much fun fantasizing about a big, new kitchen and luxurious bath! Ooooooh what about a new sunroom and new stone patio? Got to love those outdoor entertaining spaces.  Maybe you want to finish a basement or attic and wonder if it's worth it?   I can relate.  I love home improvement projects and it's probably when I am my happiest. It brings out my creative side and I love to see something worn, old and ugly turned into something beautiful.

My sweet money pit...  but I do love her so! 

Older homes like mine can be a real challenge because so much money is often spent on important systems and structural repairs that you may not have much money left in the budget to put toward interior design improvements and decorating. Old home layouts can by very funky and hard to improve without major construction. I've run into the standard problems with my antique home and had to update wiring, plumbing, the heating system, exterior painting, roofing and some structural work. Don't get me wrong, I love the old house and am happy to be the one that was able to save it. It was being neglected and once old houses start going down hill, they slide quickly into some very expensive repairs.

It can be frustrating to hold back when you want to do a construction project to make the house beautiful and suited to your taste.  It's best long-term to have patience and a plan to determine what projects matter the most to you and are going to pay you back. 

The following tips have some advice on which projects to tackle first and when to stop spending money on improvements.

Note:  I have a couple of simple math calculations in here, but don't panic.  They are easy and I'll walk you through with examples.  These are the numbers that will help to keep you from spending too much on improvements. These are basic figures and don't capture all the extra costs of selling and moving.

1.  First  - Analyze your current housing market and the actual value of your home. 

Your town assessment can be a start.  Check your last tax bill for your assessment.  Some towns have an online City Assessors database that will not only allow you to see you home's assessment, but those around you in the neighborhood or you can visit City Hall and ask them for the information. 

If you can afford it, the best way to go is to get an appraisal.  A detailed residential appraisal will usually run between $300 to $400.  That will give you a list of comparable properties in the area that have sold recently.  Your home will be analyzed against those comps and other sales in the area and the value of your improvements will be added and any problems or outdated items with the home will be subtracted. 

If you're not comfortable with either of those, you can always ask a real estate agent to put a report together for you.  They may charge you a fee for this service but it's generally a lot less than an appraisal but it's not as detailed.

Remember, house values are always subject to change based on the market.  Even when you have an appraisal, it's no guarantee that your house will sell for that amount.

2.  Once you have the value of your home, subtract the amount of the fee you would pay a real estate agent to sell it (that's generally about 6%).  Once you have that number subtract what you paid for the house when you purchased it.

We are trying to get to the number you have to work with for improvements.  Here's an example:

House Resale Value:                  $280,000
RE Broker's Commission (6%):  - 16,800
Total:                                          $263,200

Total:                                         $263,200
What you paid for it:                -  205,000
 Potential Improvement Fund:   $58,200

3.  Make a list of all the repairs and improvements REQUIRED for the home.  Get estimates for the work and subtract that from the potential improvement fund money.

This list includes the important systems and structural stuff that the house needs in order to keep it in good shape.  It is also the basis on how a home inspector will rate your house.  They look at the pretty stuff too but it's the systems and structure that really matter to them.  This list may include such things as new roof, chimney work, a more efficient furnace and/or cooling system, repairing the foundation, rotted decking/porches, exterior painting/siding, replacement windows, electrical, plumbing, driveway.  Other than the exterior painting, you don't really get to have a lot of fun with those items. 
Potential Improvement Fund:   $58,200
New Roof on Garage:                 - 3,500
Energy Star Furnace/Install:       - 6,000
Replace Decking on porch:        - 2,500
Balance Improvement Fund   $46,200
Boy, those numbers look good to me. Wish that was all I had to do!

4.  Decide on your budget for renovations and interior design improvements.

Just because you have $46,200 left, doesn't necessarily mean you should use it all.  You'll want to keep as much as you can.  The lower you keep the costs, the more profit you make when you sell eventually.  There are also other costs to moving than just broker's fees, so try to keep that in mind as well.  If you are taking a home equity loan or refinancing (which I hope you're not) you won't be able to get access to the full value anyway. You'll probably only be able to get to 80% of value.  So figure out how much you have to spend.  Let's say I want to keep a $25,000 profit so my improvement budget is $21,200.  I usually will save cash and do a project at a time.  Yes, it takes longer but I don't have debt hanging over my head and I sleep better.


5. Okay, before you start with you interior design, just STOP for a minute.  Now look around closely at your neighbors. 

Would you say you're the nicest house on the block or somewhere in the middle or lower end?  Middle or lower can be a good place when you want to make improvements because your home value will be effected by the nicest house in the neighborhood and you have room to grow.  If you're already the highest valued house (like mine...) and everyone has lower values, it will be tougher to get your money back out of your improvements. 
Now is when you can start your fun list of improvements.  Evaluate the type of finishes the other houses have.  Do they all have granite kitchen countertops and you have laminate?  What about things like hardwood flooring, tile and fireplaces?  Outdoor living spaces?  You'll want to try to keep up if possible for the best resale value.  If you have some extra room in the budget go a little nicer.  Just don't go too crazy as you'll lose your return on your money based on the neighborhood.
So, your analysis shows that all the houses in the neighborhood have decks or patios and your house doesn't.  That's a good area to improve and get value.  You can also look at using some of the money to update any outdated rooms, such as kitchens and bathrooms.  Some new appliances, a fresh coat of paint, new faucets and hardware can go a long way in a kitchen.  Sometimes the simple changes can give you the most return.
The article below has some good examples of which home improvements have the best return.  The average return on a home improvement dollar spent is appx 60% so we need to plan wisely.

 10 Remodeling Projects That Pay Back Most

It's really what matters to you.

If you're living in your dream home and want to stay there another 20 years then by all means, do all the projects that will make you happy as long as you can afford them.  At the end of the day, it comes down to what is important to you and your individual situation.  Many homeowners are just breaking even or upside down on their mortgages and value of their homes.  It's a tough position because they still need to keep the house maintenance up but probably shouldn't invest anything for improvements unless they are absolutely necessary for resale.
Not everyone can handle a house that needs remodeling.  I like helping out an old home and I love thinking of the history of the families before mine.  It is still frustrating for me to have to sacrifice in some areas that I would like to improve.  It's a balance between what is best for the house, your finances and what you love.
I hope this post has helped you in some way.  Next post we're back to the pretty stuff! We'll be looking at Ralph Lauren wallpapers on Wednesday!  ;-)


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