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Remodeling: Increase Profits with Data

I hear from homeowners all the time that they’d love to sell their house, but they have to update it first to make sure they get “top dollar.”  This mindset not only increases anxiety but is also not necessarily true.  Homeowners can find themselves in trouble when improving their home, because they focus on improving the wrong things that don’t pay off.  When considering a remodeling project, you need to focus on projects that get the highest return on investment and adopt a cost-effective approach.

Data is your friend

There is a really cool report called the “Cost vs Value Report”, which looks at the cost of mid-range house projects compared to the resale price.  The idea is to use this report to help figure out if it’s worth it to pursue a certain remodeling project.

To determine the cost of remodeling projects, data is collected from contractors throughout the country, then adjusted to account for your specific geography.  Construction cost figures include labor, material, and subtrade expenses, plus industry-standard overhead and profit.

The resale value amounts for this report are gathered from real estate agents throughout the country via online surveys.  The agents are given three-dimensional illustrations and project descriptions, plus construction costs and median home prices for each city. With that information, the realtors determine the resale value of the project.  Now there is subjectivity here, but there were over 4,000 agents in this survey which gives me reassurance that these are fairly good estimates.  At the very least, these projects can be compared to each other to determine which ones add the most value.

The chart below highlights some of the best and worst remodeling projects in terms of costs recouped.

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“You never get a second chance to make a first impression”

You’ve heard this before and this data helps drive the point home—curb appeal matters.  Three of the top four cost effective remodeling projects are related to curb appeal including front door, garage door, and manufactured stone veneer.   Whether consciously or unconsciously, potential homebuyers associate the exterior condition and appeal to the interior condition.  If you’re thinking about selling, start thinking critically about your curb appeal.  Start practically by fixing anything broken, pressure washing your house, improving the quality of your lawn, pruning shrubs, freshening up mulch, planting colorful flowers, etc.  If you want to step it up a notch, consider a new front door (at least painting it), new garage door, new mailbox, replacing rock with mulch (painful job but worth it), new house numbers, and painting your house.  Even take into consideration getting feedback from a landscape designer.

Think twice about that new addition

The least value add projects tend to be the larger interior remodels.  Always at the top of these lists are additions.  They are expensive to build, and you’ll never recoup the costs.  Keep in mind, I’m looking at things from a financial perspective.  A remodeling project may still make sense for you if you really enjoy the improvement while living there, though you won’t recoup your entire investment when you sell.

The cost-effective approach

Remodeling purely for resale value usually doesn’t pay off financially, unless you have a cost-effective way of doing it. The good news is that it’s fairly easy to save a lot of money and increase your profits by focusing on reducing the cost of your labor and materials.

If you can do some of the work yourself, or hire an affordable handyman, there’s a good chance your remodeling project will pay off.  One of the challenges is in finding a reputable handyman that can do affordable, high-quality work.  It can take time and trial and error to find one, but a good handyman is invaluable and will actually make you money.  Good resources for handymen are local realtors (of course first on the list), property managers, family and friends.  I even venture out to Craigslist sometimes in search of retired contractors looking for part-time work.  Some connections I’ve made have been awesome although others unreliable.

There are a ton of cheap yet high-quality materials available—you just have to look for them.  A great resource I have in my area is the MN Home Outlet Store.  “Home improvement heaven on earth,” as one fan put it best on their site.  They specialize in overstock and returned items from larger home improvement stores for roughly half the cost.  For my recent bathroom remodel I saved over 500 dollars between the tile, vanity, toilet, and hardware.  Inventory tends to vary each week and it moves fast.  You may not find everything you need there, but it’s a requirement to check out before you start your next project.

Make sure to also browse the Craigslist “materials” section.  You’ll often find contractors selling high-quality excess building materials from their commercial projects, which may happen to be just what you need for your smaller house project.

Take away

Remodeling costs and values are often misunderstood, and there is a lot of misleading information out there.  Homeowners have a tendency to overestimate resale values. When considering a project, take a few minutes and look through the entire Cost vs. Value report online.  Use the resale values within the report to compare to your estimated costs for a particular project.  If your estimated project costs are less than the potential value added, then there’s a good chance the project is worthwhile.

Hope this helps as you consider remodeling projects and potentially selling your home!

August 6, 2016 In: Real estate, Selling Comments (None)

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