Finance Globe

U.S. financial and economic topics from several finance writers.
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Be Careful About Over-Improving Your Home

We spend a lot of money improving our homes, sometimes too much.
Home owners just love to make their home-sweet-home a little sweeter. We spend a lot of money, put in some hard work, and then relax and take in the beauty of it all. It can be a never-ending process; often, we don't stop at that one project that originally prompted us to improve our home. One completed project often leads us to see the other areas of our home that could use some touching up, or even a complete overhaul.

But be careful about spending much more than you can recoup at closing if you know you plan to sell someday, or even if you're not sure that you're going to sell. There's a common misperception among homeowners that the money and work they put into improvements will make the home worth more. Improvements can make a home worth more, but not always to the degree that the homeowner was expecting. Many types of improvements will not be rewarded back at the closing table dollar for dollar. And if the homeowner went overboard on top-of-the-line items or luxurious extras, they're going to lose even bigger.

Too many homeowners have put big bucks into personalizing their home, only to find out that the market isn't willing to pay enough to make those improvements financially worthwhile. When they sell, they may end up paying out-of-pocket to pay off a home-improvement loan. Or, even worse, they may be stuck in a home that no longer suits their needs, simply because they cannot afford to take the loss.

Now, we're not talking about maintenance and repairs of a home; failure to keep up with standard home maintenance is what puts a home into the "fixer-upper" category. Some who buy those types of homes do so as a business decision. They fix the homes with their own hard work, sell at a profit, and may continue the cycle and move up into another home that needs work. These individuals succeed because they know the real estate market, have experience in the construction process and are very handy, and have access to the funding for the improvements. And, they know to improve a home only to the degree that is financially beneficial.

Be careful about over-improving your home.
But the vast majority of homeowners aren't planning their home improvement projects as a business decision; they simply want their home to better suit their needs. Those needs may be for functional or aesthetic reasons. They may desire an awesome outdoor living space, an updated kitchen with the latest appliances and fixtures, or an office suite with built-in bookshelves and file storage. All the reasons for home improvements are worthy, but the mistake is made when they think they'll get back the money they put into it. They improve their home to suit their own needs, and then expect the next buyer to pay them back for it.

Kitchen and bathroom remodels are the best home improvement investments for cost recapture, and usually get back about 83% of the cost, or up to over 100% of the cost in some areas. Sunrooms typically get back about 59% of the cost. Finishing a basement typically pays back about 50% of the cost. And in many areas, a swimming pool is considered a liability rather than an asset due to increased maintence costs, and home buyers with children often feel a pool is a source of danger, and would rather not have one. So much of the work you do to your home should be primarily for your benefit, and not for financial gain.

It's one thing if you're improving your home for your personal benefit, and you're able to pay for it. It's a completely different story if you need to get back most of what you put in when you sell because you took out a loan to improve your home. That's when it becomes most important to research whether your home improvement plan is a good idea. Rather than spending big bucks to change your home, you may find you'd be in a better position if you sold your current home and bought a home that is already more of what you actually need.

No matter what type of improvements you are considering, take a look around your neighborhood. The single most important question to ask before you decide how much money to put into improvements, "How much are the other houses in the area selling for?" No matter how much or how little you put into a home, you won't be able to sell your home at a price that far exceeds the others in your area. Being the best is good in many other aspects of your life, but it usually doesn't pay off to own the best house in the neighborhood.

People that are in the market for a home typically narrow down their choices by house hunting in a few particular areas that they know is within their price range. Home buyers would move to a more luxurious location before they are willing to pay top-dollar for a house in a neighborhood that is generally below their price range. Then, instead of paying extra for a home that is designed to your tastes, they can use the savings to improve their new home to suit their own needs and desires.

Before you start knocking down walls or installing custom granite counter-tops, check out the selling prices of homes in your area. Find a local real estate agent to prepare a complimentary home sales report for you. Or, if you feel bad about asking someone to work for free, check real estate websites to get recent sales prices for homes in your area. Think hard before moving forward with your home improvement plans, if the improvements will cause your home to out-price the others in the area.

Home improvements that are within reason will keep your home comparable to others in the area or in the neighborhood. How much is "within reason"? Well, that's all relative to the neighborhood your home is in. A luxury home in a neighborhood of half million dollar homes may be a good candidate for a $50,000 kitchen remodel. But a home worth $130,000 in a neighborhood that ranges from the $120s to $140s, with that same kitchen remodel, will likely be in the over-improved category.

But on the other hand, a house isn't your home until you put your personal touch on it.
A home is usually the biggest investment that the average person has, but homeowners often make improvements based on emotional reasons. There's nothing wrong with improving your home so that being there is emotionally pleasant, as long as you are willing to accept that you may not get back all or even much of your investment.

It really doesn't matter if you spend a little bit too much if you plan on staying in your home for good, or at least for a good while. If you're never going to sell, then resale value won't matter. And if you'll sell someday far off in the future, then real estate appreciation should help ease the pain of over-improving your home. In these cases, it's not so much about the money, but about making your home comfortable while you live there.

And if you choose to use part of your entertainment budget or vacation budget for home improvements, you'll get long-term benefit, rather than something that's over in two hours or two weeks. Vacations and going out for fun are done and over with and you'll never see long term rewards. Using some of that money to make your home nicer can reward you every day that you live in your home.

If you make your home more comfortable for you and your family, you'll probably spend more time there. Home improvements, priced within reason, may save you money in the long run if it means you have less need to go out for entertainment. And, convenience, efficiency, organization, peacefulness, and relaxation are all important needs that are really hard to put a price on.

For example:
  • Spending money to make your backyard into your own private retreat may possibly reduce your need for expensive vacations.
  • Built in storage in every room of the house may not get back every invested dollar if you choose to sell, but it can bring peace to live in an organized home. Reducing visual clutter will let you relax, and it may be well worth the money you put into it.
  • Finishing a basement may not bring full price at re-sale, but having a family room where everybody can hang out together is priceless.
  • Your home may already be perfect, except that your family could really use an extra bathroom. Though it may take a good bit of cash, it's likely to be something that every one in the house will be grateful for.
  • Updating a kitchen may make cooking and eating at home more enjoyable, and reduce the desire to go out for dinner as much.

If you like spending time at home, then making your home perfect for you is what's important. Just keep it within reason and know that your cash and hard work may not pay off financially when it's time to sell. As long as you have the money to do it, and you're improving the home for personal enjoyment, rather than as an investment, there's really no harm in making your home a nicer place to live. But be especially careful if you're considering a major renovation that requires taking out a loan. It would be difficult to deal with if you find that you can't sell your home at a price that would pay off your mortgage and your home improvement loan.

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Monday, 22 April 2024

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