THE summer months are a particularly popular time for updating houses, with new bathrooms, new kitchens or even a new roof. But whether the renovations add to a home’s value, that’s a different matter.
Even when they do increase the price a seller may get, they rarely increase it in line with how much the renovation costs.
“People confuse helping the home keep up with the market with an upgrade or a renovation,” said Jonathan Miller, president and chief executive of Miller Samuel, a real estate appraisal firm that covers the New York metropolitan area. “The simplest example may be refinishing your floors or repainting the inside of your house. Those are things that need to happen every so often so the house doesn’t fall behind the market.”
With renovations, he said the relationship between cost and value is always changing. At times, a US$100,000 renovation may add only US$50,000 to the value of a home. In other instances, spending US$50,000 may increase the value by US$100,000, he said.
And there are the times when the renovation may decrease the home’s value. Mr Miller remembers a one-bedroom apartment in Greenwich Village that he appraised almost three decades ago. The apartment had a US$30,000 built-in entertainment system that was purple Formica.
“The owner thinks the value is the apartment plus US$30,000,” Mr Miller said. “The buyer is thinking it’s the value of the apartment minus US$3,000 to remove it and repair the wall. Here lies the problem.”
What is going to add value depends as much on the type of renovation as the particular housing market. And Mr Miller said he tells clients that “personal taste and market taste” can be different.
New roofs and insulation have great financial returns, said Jessica Lautz, managing director of survey research at the US National Association of Realtors, which teamed up last year with the National Association of the Remodeling Industry to determine the value of renovations.
Ms Lautz said people who would like to recoup more of their investment would do better by aiming for boring. Putting in new insulation and garage doors or replacing a roof, siding or windows adds value and saves energy.
But new kitchens and bathrooms make owners happy, and their value is more difficult to discern.
According to the Realtors report, the average price of a kitchen renovation is US$60,000 and carries a “joy score” of 9.8 out of 10.
Yet, the report found, only 67 per cent of the price is recovered when the owner sells the house. A bathroom renovation typically costs US$26,000 and has a joy score of 9.3, but only 58 per cent of that will be recovered.
Stan Humphries, chief economist for Zillow Group, said he found in his research that high-end bath and kitchen renovations were among the worst investments (though not as bad as finishing a basement).
On the other hand, he said, a “midrange bathroom remodel” could reap a big increase in value. These are renovations where a fairly bland bathroom is made into something “you’d bring your guests into”, he said. The return is US$1.71 for every US$1 spent.
“When you get way up into the finishes for a bath or kitchen, you start to really apply a strong aesthetic to that renovation,” he said. “When you make choices about backsplashes and finishes, the buyer may not like it. But they’re going to appreciate a usable bathroom, regardless.”
Whatever the renovation, its ability to increase the value of a home can be short-lived.
“A renovation beyond three years – unless it’s something major like a new storey of your house – isn’t going to matter that much,” he said. “The ‘new car smell’ of that renovation has gone away, and your neighbours have done the same thing.”
Still, Ms Lautz said, big, expensive renovations may be necessary just for sellers to attract interest on photo-heavy real estate websites. “You look at homes online and see the new kitchens and bathrooms that really sparkle,” she said.
This benefit varies, depending on demand in a particular housing market. “If you’re in a housing market with very tight supply, all of a sudden the value spread between a home that needs a lot of work and the home that doesn’t need any narrows,” Mr Miller said. “In a market where there is an oversupply, it’s just the opposite. There’s more of a premium for a home that has already been done.”
New Canaan, Connecticut, an affluent town an hour from New York City, is experiencing one of those gluts. Amanda Briggs, the brokerage manager at Houlihan Lawrence there, said the town had a lot of listings for large, four-storey homes that are 10 to 15 years old.
“They’re perfectly maintained,” she said. “But these houses look more dated than they are. The cabinets look outdated. Buyers want to redo them and they’re factoring in the costs to the price.”
Ms Briggs said her agency has published a guide for its brokers on the science of pricing. While she demurred on what that science was, she offered statistics showing the downside of getting the price wrong.
In New Canaan, the houses that are properly priced are on the market for an average of 76 days and sell for 97 per cent of the asking price. But the time on the market for homes that need at least one price reduction goes up to 226 days and the eventual selling prices is only 87 per cent of the list price.
One factor at work is the difference between what Ms Briggs called buyer’s math and seller’s math. “Sellers think acquisition cost plus what I put into it is what it’s worth,” she said. “Buyers are looking at price per square foot and Zillow’s analytics.”
As for personal touches, how they contribute to value depends on whether they make a home more or less attractive relative to the homes around it.
Lilly Lenavitt, an agent with Compass, a real estate agency in Los Angeles, said the basic upgrades apply in that market, with a premium placed on pools. The value of a gym, though, could go either way.
“If they can put a gym in, and it’s just a room where all the equipment can come out, it’s OK,” she said. “If you’ve personalised it and it can only be used as a gym, you’re narrowing your buyers.”