Thinking of Remodeling? Consider Cost vs. Value of Home Renovations
No matter how much you love your home, you’ve probably thought about making a few changes. Maybe it’s the kitchen that needs a face-lift, or could it be a bathroom still sporting old-style tile? Maybe you’ve been admiring your neighbor’s new sunroom or patio, or perhaps the drafty family room and high heating and cooling bills are finally motivating you to upgrade your HVAC system. You may also be thinking about moving sometime soon and want to make changes that will bring a higher price when you sell.
Whatever your motivation and whatever the renovation, you may be wondering if the benefit you get from the change will be worth its cost. Part of what can make this a tough decision is that much of the benefit is intangible. How can you put a price on the pleasure you get from cooking on your new stove, or cutting up vegetables on the built-in chopping block in your new countertops? Can you put a price tag on the joy you get from entertaining friends in your new sunroom, or the romance of sitting in your screened porch during a summer thunderstorm? If moving is part of the picture, how can you determine if the changes are ones that will also appeal to potential buyers?
While it is difficult to quantify the intangibles, you can get help with one of the tangible benefits, which is the extra dollars your renovations may bring when your home goes on the market. Called the “Cost vs. Value Report,” this information is based on an annual collaborative effort between Remodeling and REALTOR® Magazines. Results are based on a Web-based survey of more than 150,000 REALTORS® and appraisers in 80 cities.
Participants give their opinion about the increase in home values attributable to 33 different remodeling projects. These opinions are then compared to city-specific cost estimates for the same projects to find the expected return on each one. Projects range from replacing the front door, to adding an attic bedroom, to doing a major kitchen or bath remodel. The results provide interesting insight on the value that remodeling jobs continue to contribute to the sales prices of homes in different parts of the country.
Costs and the Value of your Home
Obviously the extent to which you receive a return on your remodeling costs depends in part on the price of your home when it goes on the market. Lately in our area as well as most other places in the country, we have experienced falling home prices. In the most recent report on our local real estate market, the Charlottesville Area Association of REALTORS® (CAAR) reported that at the end of 2009 median home prices had fallen by $20,823 (-7.8%) compared to the end of 2008, putting it below 2004’s year-end median price. Is it possible to recoup some of your remodeling costs in this kind of market?
The answer is, yes. The cost-value ratio is expressed as the percent to which a particular cost is recouped by an increase in resale value. Certainly the chance of recouping a higher percentage of costs improves the longer a family stays in their home, since over time many expect home prices to rise again. Homeowners may also benefit if remodeling costs stay low. While the Cost vs. Value Report describes job-specific costs and values, these figures are also expressed as one composite average. At the national level, the composite average of costs has risen 40.3% since 2004. Resale values, in contrast, have only risen 11.3%. This means over time, the cost-value ratio has declined. As an example, 2008’s ratio was 67.3%, while at the end of 2009 it was 63.8%.
On the other hand, the South Atlantic Region that includes all of Virginia has fared somewhat better than the national average. Here home values have decreased, but remodeling job costs have decreased even more. As a result, the percentage of costs recouped in our region is higher than at the national average.
According to Mike Gaffney of Gaffney Homes, one reason for the decrease in remodeling costs is the increased availability of skilled workers who are not as busy as they were when the new homes industry was booming. In contrast, Pacific region cost increases were twice those of the national average. However, since resale value increases in that area exceed the national averages by 33%, this region also experienced a high average percentage of costs recouped.
Remodeling Jobs that Pay
Since in most cases it is not reasonable to expect to recoup the entire cost of a renovation, the cost-value ratio is normally less than 1.0. There are always a few exceptions, however. This year the prize for the highest return went to installing a steel entry door. This renovation recouped 128.9% of the cost at the national level, and even more (146.8%) in the closest local market included in the study, which is Richmond. At the low end of the national scale, costs recouped included 48.1% for a home office remodel and 50.7% for the addition of a sunroom. Richmond figures were very similar, although the sunroom came in a little higher, at 55.3%.
What are the jobs with the highest cost-value ratio? Seven of the top ten are exterior projects. Others in addition to the steel door include siding, deck, and window replacement projects. Non-exterior projects in the top ten include kitchen and bath remodels and adding an attic bedroom. Cost-value ratios in Richmond mirror the national averages, but in most cases are higher. For example, the cost-value ratio for an attic bedroom nationally is 83.1%, while in Richmond it is 90%, possibly reflecting the lower remodeling costs.
The popularity of window and siding replacements suggests energy efficiency as one motivation for remodeling. Jay Willer, Executive Vice President of the Blue Ridge Home Builders Association (BRHBA), pointed out that these investments are popular because of their predictable payback. For example, window replacements are a plus because of the almost guaranteed monthly savings, which can be as high as 15% to 20%.
Although energy-saving appliances and HVAC equipment are not included in the projects evaluated for the Cost vs. Value Report, Willer said they are popular renovations nonetheless. He stressed the importance of low-cost changes that lead to savings and help people feel like they are doing their part for the environment. The benefits of smaller changes, such as replacing incandescent bulbs with compact fluorescents or upgrading to Energy Star appliances, help create a momentum for larger changes, which could be adding insulation or upgrading doors and windows. The green market builds on itself, he said.
There could be a number of other reasons for the importance of exterior jobs. One is that they are relatively inexpensive. For example, while the cost of a major kitchen remodel in Richmond may average over $40,000, the cost of a wood deck is less than $10,000 and the high-paying steel door can be had for only $1,055. Exterior remodels may also contribute to a home’s curb appeal, which is particularly important in our current real estate market.
As has been true in the past, kitchens and baths have some of the higher cost-value ratios. A minor kitchen remodel, which includes face-lift items such as new cabinet fronts, oven and cooktop, or sink and faucet, has a cost-value ratio of 78.3% nationally and slightly less in Richmond. While this is a relatively high return in this report, the value of this particular project has come down a lot from a high of 101% in 2005.
While the return is less than some others this year, real estate professionals agree that buyers definitely prefer homes in which baths and kitchens have been upgraded. This means if you have plans to sell in the next several years, even minor upgrades in these rooms are worthy of consideration. Not only might they boost your price, but they may also help your home sell more quickly. Of course, don’t underestimate your benefit as you live in the home during the intervening years.
Importance of Cost-Value Ratios
Do high cost-value ratios translate into a higher demand for certain type of remodeling projects? Mike Gaffney does a lot of whole-house projects, often focused on upgrading living spaces. For example, a remodel may increase the size of the kitchen and eliminate areas such as separate dining rooms. He feels that for many of his customers, recouping value is secondary. They are more interested in making their home a place where they can stay awhile with more comfort. He described one client who couldn’t decide for sure if he would sell his home in three years or keep it forever. Either way, he decided to go ahead and remodel because he wanted to increase his enjoyment of the home while he still lived there and he wanted to take advantage of today’s lower costs.
What about projects such as a home office remodel or sunroom that have low cost-value ratios? Should they be avoided? The answer is, not necessarily. The reason for the low return may be that these are relatively specialized spaces that primarily reflect personal preference.
For example, for someone who works at home, the office is indispensible. However, if the home goes on the market and an agent brings a buyer with a baby that needs a nursery, an office becomes a negative. Similarly, buyers looking for more bedroom space may not appreciate the additional square footage devoted to a sunroom. On the other hand, if you are considering one of these renovations and plan to stay awhile, don’t be deterred. The intangible benefits may be well worth proceeding with the upgrades.
Move or Stay
Why do people choose to stay in their homes rather than sell and buy something they like better? Jay Willer suggested that for some people, it makes sense to stay and remodel because of the difficulty of selling in today’s challenging real estate market. Mike Gaffney agreed, but said that in his experience, the people who choose to stay are those who love their neighborhood, like the feel of older homes, and enjoy their neighbors. These additional incentives increase the value of remodeling when compared to selling.
Perhaps these are also some of the reasons for the surprisingly high cost-value ratio on attic bedroom and basement remodels, which came in at 90% and 84.4% respectively in the Richmond market. For families who need more space, but don’t want to move, remodeling the attic or basement is a way to get more useable square footage in an existing house. For the eventual buyer, these upgrades offer more livable square footage per dollar invested in their new home, and at the same time, they are renovations which have a more universal appeal than a project like a home office.
For detailed information about this year’s Cost vs. Value Report, including analysis of the findings, visit: www.remodeling.hw.net/2009/costvsvalue/national.aspx.
Celeste Smucker is a writer, editor and author of Sold on Me, Daily Inspiration for Real Estate Agents. She lives near Charlottesville.
