Homeowners are opening their wallets. A rebound in the housing market has made them more willing to invest in renovations that could boost the value of their homes even more in a rising market.
Spending on home remodeling has picked up over the past 18 months and is expected to rise nearly 20 percent to $151 billion by the fourth quarter, according to a recent report by the Joint Center for Housing Studies at Harvard University.
Many homeowners decide to make upgrades with the idea that the bigger kitchen or finished basement will make their home more enjoyable. But those looking to sell should know that not all home improvement projects will boost the value of a home.
Here are six tips when considering investing in home improvement projects:
1. CONSIDER ALL BUYERS
The classic example here is installing a swimming pool.
A pool could make your home a tougher sell and it's unlikely you will recover your expenses, says Richard Borges, president of the Appraisal Institute, a professional association of real estate appraisers.
It may be a deal-killer for buyers who might not want to take on maintenance costs or safety risks for small children. "It's not going to contribute a full measure of its cost of installation because its utility is so limited," Borges says.
The principle holds true for other large projects that can alter the structure of the property, such as adding a second garage. In some neighborhoods, they may be a common feature that becomes a selling point. But if it's not common, it could discourage buyers who don't have a need for it.
2. DON'T 'OVERIMPROVE'
Some home improvements can help lift a home's resale value, especially updates to features like cabinets and appliances that are clearly dated.
The key is to select finishes and appliances that don't go well beyond what a buyer might find in similarly priced homes in the area. The term appraisers have for that is "overimprovement."
Consider a homeowner in a neighborhood with modest homes who splurges on pricey countertop finishes like quartz or marble. They're not likely to recoup the cost when appraisers look at recent sales of comparable homes that may not have such lavishly appointed kitchens.
This applies to everything from lighting to flooring and bathroom fixtures.
3. CONSIDER RISKS OF EXPANDING FOOTPRINT
One of the home improvement projects that's least likely to produce a return on the investment is a room addition that expands the size of a home beyond its original floor plan, says Borges.
Projects that require tearing down an exterior wall often involve moving doors, windows and other features, which can drive the costs higher than, say, converting an attic into a bedroom, which uses existing space in the home.
The more expensive the project, the harder it can be to recover one's costs.
Also, making major changes to the original structure, even when permitted by the city, runs other risks.
"When you become the oddball, the only home in the neighborhood with four bedrooms, probably the fourth bedroom is not going to be that desirable," Borges says.
4. CONSIDER COST-TO-VALUE
One way to gauge whether a home improvement project is worthwhile is to estimate how much of what you spend will be recovered at resale.
For example, if you spend a $1,000 on siding, and it only adds $500 to the resale value of your home, that upgrade is giving you a 50 percent return on your investment.
Remodeling magazine's latest cost-value-study, which is based on surveys of real estate agents, can help provide a ballpark reference. You can find it here: www.remodeling.hw.net/2013/costvsvalue/national.aspx
That said, when home prices are rising fast enough, like during the last housing boom, it's easier to recover costs spent on home improvements, regardless of the upgrade. The alternative scenario also holds true.
5. PRIORITIZE REPAIRS AND CURB APPEAL
Making the master bedroom bigger or converting a downstairs closet into a half-bath might seem like good investments, but not if you need to upgrade your roof or fix window seals.
Those fixes may not be aesthetic upgrades, but often make a home easier to sell.
Replacing your front door might cost you $1,500, but it's the type of upgrade that can make a home attractive to buyers, says Sal Alfano, editorial director of Remodeling magazine.
The magazine says replacing the front entry with a 20-gauge steel door is the upgrade from which homeowners can expect to recoup the most money among renovations that cost less than $5,000. The magazine estimates a recovery of 85.6 percent of the cost.
6. CONSULT AN EXPERT
Before moving forward on a home improvement project, consult with a real estate agent or an appraiser who knows your market.
They should be able to gauge how the upgrade could affect the sales price of your home. That can help you determine how much of your investment you're likely to recoup.
Almost all appraisers are independent and set their own fees. A consultation could cost between $500 and $1,000.
Real estate agents might be willing to offer their assessment for free, perhaps with the understanding that they might earn your business when it comes time to sell.