Renovation: Does Improving Our Home Pay Off?

Part 5 of 6 of  Wela’s series on buying a house.  

I need the newest and greatest piece of technology.

I need to go to Europe.

I need these new Nikes.

I need a new pair of shades.

Have you ever found yourself making these claims or similar ones?

It’s part of our culture and part of our psyche to believe that we need something when it’s actually just a want or a desire.

Let’s play a quick game.

If you were to be given three things and you had to live off of just those things what would they be? Now, remember that you are not going to be able to get anything else… EVER!

What would you choose?

Maybe a good portion of you all chose some of the obvious, food and water. Possibly some of you chose shelter. Or maybe a car. Or some of you clever readers may have said money… very sneaky!

In reality we really only NEED three things: air, water and food. If we have these then we can live. Everything on top of these three things is gravy.

Many of us have been fortunate enough to receive more than just the three essentials in our life. However, now we’ve gotten so used to these extra things that they feel like needs now.

If we break everything down, though, our needs will always come back to these three things.

So, that whole conversation above was pretty deep… I get it. Don’t worry, the rest of this article isn’t trying to convince you to just live on those three things forever… I promise.

However, it was meant to show the constant struggle that our minds battle over need and want. We continuously believe that we need to spend our money on things that are just desires. And we become so convincing that we talk ourselves into believing that what we want is actually something we need.

We do this in all aspect of our lives.

Fair warning, with a house we can also find ourselves doing this quite often.

 

Sheltering our desires

We saved up for our dream house, and made the biggest purchase of our life.

The house is furnished, and we have been maintaining it for a couple of years.

We are bored!

It’s time to make some home renovations.

I can’t wait for the warmer weather.  My backyard needs something special. I need to spice it up for the warmer weather that is on its way.

You know what I need… a pool!

Have you ever had this thought process or one similar to it in terms of desire?

I mean I think that having a pool would be awesome. Actually that is something that I have wanted for years.

However, the real question is whether or not that large purchase will add incremental value to your house. Will you ever get the money back on the pool when you sell the house?

Or would it make more sense to get a new front door or replace the garage door?

The door or the garage seems like more prudent renovations as opposed to a pool. But they aren’t sexy. In fact, they are actually quite boring.

We want to go with the sexiest option. The one that fills that newly minted need. We need that pool, right?!

Too often we find ourselves leaning towards the desirable, more attractive house renovation before we go with the actual necessary renovation.

Again, we are great at rationalizing and convincing ourselves that we actually need that desire.

 

Separating emotional benefit from financial benefit

In reality we just don’t know if any renovation to our house is truly worth it.

Yeah, fixing a leaky ceiling or a damaged roof or getting rid of mold is worth it. Now what about an addition to the house or building out that new bedroom?

These are the renovations that we just don’t know understand what the true value is until we sell the house.

And most of the time we don’t accurately track whether or not a home renovation was worth it. We tell ourselves that it was, but we don’t write out how much our house was worth before the renovation, and then document the cost of the renovation. We then don’t track what comparable houses are worth without the renovation we just made and compare that to our house value over time.

This just doesn’t happen. Hell, I feel winded just explaining how to track it. It’s too confusing and too much work. So we default to just telling ourselves that it is worth it.

How are we expected to make a good decision on whether to make an appropriate renovation or not if we don’t have all the necessary information?

See that’s the problem. We can Google whether or not a renovation makes sense. We will then get a list of things that make sense and those that don’t. Some people say that a pool would add value while others say that it doesn’t.

In the end, we typically side with the emotional desires because of the difficulty to determine whether the renovation makes sense or not and because our emotions tend to overcome logic.

That means as we list out what renovations we want to make we will pick the ones with the highest emotional appeal. This obviously sits well for the pool guys!

I am going to end that today. We are going to look at the five best renovations and the five worst renovations. This is all based on real data.

Yeah, other people can argue against these, but the fact is that data speaks…  and their arguments are just opinions.

 

Take it easy

Before we get into the fun of seeing what is ranked the best and worst, we need to cover a few basics when it comes to home renovations.

First and foremost: get your budget right. Some of you may be laughing, I am! There is no way to predict the actual cost of any home renovation. What I mean by right, is don’t make the mistake of trying to budget to the exact penny. Create a buffer. Take whatever you think the cost will be and add a 20% buffer.

If you don’t even know where to start on cost for certain renovations use this great resource from houzz.com (http://www.houzz.com/remodeling-costs/kitchen). The link provides you some ideas as to what people are spending in your area for different remodeling projects. They provide some guides on these projects along with some professional contacts.

Now you can get an idea of how much you need to save for this renovation.

Wait. Before you start the renovation some more research is necessary. How big are other houses in your neighborhood? What is the price of other houses right now in your neighborhood?

We want to be sure that the improvement that we make to our house doesn’t “over-improve” the neighborhood. Although you may find it sexy to be the best house on the street, it isn’t sexy to the resale market.

If you are going to add a new addition to the house that will make your house drastically bigger (500 – 1,000 square feet) than other homes in your neighborhood, then you may not get the return on this you desire.

If you will to need to price your house much higher than others on the street in order to get your money back for the renovation, you may be making a bad decision.

So, do your research to make sure that the renovations are actually helping you rather than hurting you.

 

What renovations provide a return?

Remodeling Magazine puts out an annual report on what home renovations (remodeling’s) are most likely to recoup their cost.

The best way to look at this is to break it down from a local level and then look at it from a national average. We will take a look at the most recent report from 2015. Here is the link (http://www.remodeling.hw.net/cost-vs-value/2015/).

The report looks at what the average costs of different renovations are in the particular areas (locally and/or nationally) and compare it to the resale value of the particular renovation.

The resale value divided by the cost produces the percentage recoup that we are looking at below.

 

Top 5 renovations

 

Atlanta   National
Renovation % Recoup   Renovation % Recoup
Replace entry door with steel door 101.1% Replace entry door with steel door 101.8%
Fiber Cement siding replacement 99.7% Stone veneer accent 92.2%
Garage door replacement 92.7% Garage door replacement 88.4%
Attic bedroom remodel 89.6% Siding replacement (vinyl) 80.7%
Siding replacement (vinyl) 87.6% Deck addition (wood) 80.5%

Bottom 5 renovations

 

Atlanta   National
Renovation % Recoup   Renovation % Recoup
Deck addition (composite) 57.2% Bathroom addition 57.8%
Bathroom addition 55.8% Garage addition 54.7%
Home office remodel 55% Master suite addition 53.7%
Sunroom addition 51.9% Home office remodel 48.2%
Backup power generator 49% Sunroom addition 48.5%

 

My takeaway from the above lists is that we are likely not going to get back our money for our renovations. The best way for us to have success at getting back our money from a renovation is to negotiate well.

This doesn’t mean just go with the cheapest contractor and use the cheapest materials because that won’t help. Rather, if you are looking to do one of those top five renovations or remodel activities then work hard to reduce the cost while not reducing the quality.

My second takeaway is that there is a drastic difference between the top five and the bottom five. So, making a decision with the bottom five loses much more money compared with the list in the top five.

Just some food for thought.

 

Project conclusion

Which would you chose: boring or exciting?

Easy question. Exciting!

Which will you chose: logical or desired?

Another easy question. Desired!

The outcome from the data we looked at would likely go against your answers to both of the above questions.

A sunroom, a new deck or remodeling the home office seems like a fun and exciting renovation.

Replacing the front door or replacing the garage door seems boring. Vinyl siding? Awful!

Those are boring!

Why do the logical things always seem to feel so boring?

It probably comes back to the need versus want dilemma. Needing air, water and food is boring. Wanting new Nikes, the Apple watch and 60’ inch TV is a lot more exciting.

We have to be careful when it comes time to renovating a house that we keep ourselves from getting trapped into believing the desires we have are actual needs.

We can see that it is difficult enough to earn our money back from the boring renovations. Thus, making a decision for that desirable renovation isn’t likely going to pay off. Actually we are going to be losing a lot more money.

Yeah, I am human and understand the need of wanting to enjoy your house. That can at times mean going with that desirable/exciting renovation.

But we need to balance these desires with those that make most logical sense for our house and our financial situation.

Yes, at times we may have to make that boring decision, but we will be financially happy later on.