Buyer misconceptions about renovation value

Homeowners should weigh cost as well as value when planning a renovation.

Homeowners should weigh cost as well as value when planning a renovation.

 

Home renovation is big business. As anyone with a cable TV subscription knows, public interest in remodeling is massive and seemingly unlimited. Countless shows take viewers through the process of planning, creating and unveiling what seems like a brand-new home when it's all said and done. And as a major expense, the financial aspect of the renovations also play a huge role in the drama of these productions. Even when faced with six-figure estimates on remodeling projects, homeowners are often told that this will serve as a smart investment, boosting the future value of the home when it's time to sell.

"Some homeowners don't realize that cost isn't the same as value."

Just as with any other Hollywood production, though, these claims of a return on a remodeling investment are optimistic at best. In a column for The Huffington Post, Appraisal Foundation President David Bunton remarked on the common homeowner misconceptions regarding home fixes. 

"Homeowners are often dismayed to learn that cost does not equal value," Bunton wrote, according to The Huffington Post. "Homeowners who make certain improvements cannot assume that the cost of those improvements will be fully recognized in the marketplace. Cost is a fact: it's the amount paid for the improvements. On the other hand, value is determined by the actions of buyers and sellers in the market."

Essentially, what many homeowners don't consider is that adding $3,000 worth of new kitchen appliances, for example, doesn't make a home sell for $3,000 more. Market value is simply an estimate of what buyers may be willing or expect to pay, based on similar, recent home sales.

Survey says

That's not to say remodeling projects big or small are ultimately a waste of time and money. The right additions in an optimal market can indeed result in greater interest from buyers and ultimately a higher sales price and shorter marketing time. The caveat is that the money a homeowner puts into a project won't exactly grow on its own.

This is illustrated by taking a look through trends in residential renovations. Remodeling Magazine compiled a report on the average cost of home improvements around the country, and compared that to the final list prices of those renovated homes. In the aggregate, Remodeling found that the 27 most common projects returned about 64 percent of their initial cost when the homes sold. This cost-value ratio has been trending up in recent years, but isn't as high as a year like 2005, when remodeling projects returned more than 80 percent of their upfront costs.

Understanding the workings of the real estate market is difficult for even professionals to grasp. But the average homeowner would do well to study up on the actual value of any planned renovations. In the end, any major project should be undertaken with the current owner's needs and desires in mind, with any return on investment serving as a possible bonus. This mindset helps keep spending in check, and should result in more realistic expectations.