I am often
surprised when I see homeowners getting their homes ready to sell without
anticipating doing any repairs or improvements.
I am even more surprised when I see realtors counseling their clients
not to do repairs or improvements because “the market is hot, let’s just get it
on.” Notwithstanding the period of time
during the Great Recession, where improvements did not give the cost-value
returns we are used to seeing, properly thought-out home improvements will
typically give homeowners very nice cash-on-cash returns when they list and
sell their homes.
Cost-Value Ratio Defined
Recently,
Remodeling Magazine combined with the National Association of Realtors
completed their 2014 Cost vs. Value report that showed for the second straight
year that the cost-value of remodeling is on an upswing. One would be correct to assume that the
cost-value of remodeling improvements mirrors the fluctuations in the overall
real estate market. The cost-value ratio
is defined as the resale value of remodeling improvements as a percentage of
the cost of construction. Thus, if value
and cost are identical the cost-value ratio is 100 percent.
Timing Is Everything
Some examples
of recent annual cost-value ratios show consistency in the theory that real
estate market trends coincide with cost-value ratios. In 2005 prior to the market peak and crash
the national cost-value ratio was approximately 86.7% which continued downwards
for the next eight (8) years until the 2013 rebound. In 2014 the national ratio is approximately
66% which represents 5% points higher than 2013.
If we all
had crystal balls we probably wouldn’t have to work as hard as we do. However, without one, we need to be mindful
of the current environment and trends to make the best remodeling
decisions. For example, if you remodeled
and dialed-in your bathrooms and kitchen eight years ago and they are still
cutting edge and in-style you would be looking at covering your costs based on
improved property values in pretty much the entire country (and you enjoyed
those improvements for the last eight years).
If you installed these same improvements in the Bay Area you probably
did really well – maybe even 2X or 3X cash-on-cash returns (where can you get
200-300% cash-on-cash returns in the investment world?).
How Does Your City Rank in Cost-Value
Ratio?
Residential
real estate markets are very localized, and this fact, along with whether or
not your long-term plans include staying in your particular neighborhood should
be the two primary factors in your decision to take the plunge into a major
remodeling project. The value of your
remodeling decisions at the time of sale is another crystal ball question;
however, location, design, workmanship, and buyer demand for your specific
installations all come into play.
Honolulu
ranked number one for cost-ratio values at 111%, San Francisco was 2nd
at 109%, and San Jose was 3rd at 100%, San Diego, CA was 4th,
Bridgeport, CT was 5th, Fort Meyers, FL was 6th,
Charleston, SC was 7th, Oklahoma City, OK was 8th,
Washington, DC was 9th and Austin, TX rounded out the top ten.
What Projects Have The Best
Cost-Value Ratio?
If you are
considering improvements to your home please take into consideration the data
from this report which shows the highest return on investment (ROI) for
individual projects:
-
Entry
door replacement (20 gauge steel);
-
Deck
addition (wood);
-
Garage
door replacement (mid-range);
-
Garage
door replacement (luxury);
-
Attic
bedroom addition;
-
Minor
kitchen remodel;
-
Window
replacement (wood);
-
Siding
replacement;
-
Back-up
power generator;
-
Basement
remodel; and
-
Window
replacement (vinyl)
The 2014
report suggested that these following projects were very important to buyers:
1) granite or similar stone countertops; 2) kitchen island and double sink; 3)
energy efficient windows, appliances, and programmable thermostats; 4) a
walk-in closet; and 5) a great room.
Pools Are Not For Everyone
Pools were
not included on the above list for good reason.
Traditionally, pools are not good returns on investment. A lap pool might be a great idea for owners
who would like to stay in shape but they are not attractive to a young family
with kids who value flat, free roaming back yards without the maintenance costs
associated with a pool. Importantly,
some buyers fill in pools the moment they close escrow to limit liability and
create usable space for their children.
Seek Advice and Counsel of an
Experienced and Competent Realtor
Not all
realtors are created equally. The better
realtors will offer complimentary services including making recommendations,
referring vendors, contractors, designers, and even managing day-to-day
scheduling of tasks for your contemplated renovation projects. No matter what project you are considering
you should consult with an experienced and knowledgeable realtor to get some
market input and another set of experienced eyes looking at your home (through
the eyes of a prospective buyer).
Remember remodeling projects almost always go over budget and if you are
looking for a high cost-value ratio and high cash-on-cash returns a local
experienced realtor can give you a good idea of the current market trends in
your neighborhood. The bottom line is
don’t do this project alone – get help.
SHELLY ROBERSON
Alain Pinel Realtors
23+ Years’ Experience, 600+ Closed
Transactions
1-650-464-3797
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