Home remodeling's payoff can vary considerably

Spruced-up kitchen, bath or new deck more likely to boost value than a pool

July 24, 2005|By MARKETWATCH

About to start that summer home remodeling project? Read this first.

For anyone who has ever put their home on the market, you know that feeling you get when you've spruced up the whole house for sale and inevitably some potential buyer touring your home says: "Maybe we should keep our house and just remodel."

This may be especially true when you look at the cost of replacing your house. According to the National Association of Realtors, homes have appreciated 6.8 percent annually on average since 1968, compared with inflation during the same period of 5.1 percent a year.

In addition, the American Homeowners Foundation estimates that it can cost up to 10 percent of a house's value to replace it with another, even one that costs exactly the same. That's because real estate transaction costs are high, including agent commissions, mortgage fees, transfer taxes, attorney costs, title searches, surveys, movers and the like.

Thus, selling one $200,000 house and buying another of similar value could set you back as much as $20,000. When looking both at home appreciation and the cost of moving, it may make sense to stay put.

An estimated 1 million homeowners per year undertake a remodeling project, boosting what was a $230 billion industry in 2003. The decision of whether to sell a house, or stay and remodel, is one that is based on many factors, including what type of changes you want to make, how long you plan to stay in the house and the cost of remodeling in comparison to the value of your home.

Experts say there are at least two rules of thumb when it comes to remodeling your house.

First, you should not increase the value of your house to a point where it is the most expensive home in your neighborhood. This could make it difficult to sell the house in a competitive housing market.

Second, you should strive to keep your new mortgage debt below 80 percent of your home's new appraised value. Not only does this keep you below the debt/equity ratio requiring you to pay private mortgage insurance on the new loan, but it also ensures you don't assume a monthly payment that precludes you from having a balanced household budget.

Remodeling magazine conducts an annual survey of the remodeling projects that add the most value to your home. The survey compares how the same 18 remodeling projects affected home values in 60 cities. The 2004 survey, the most recent, was the 18th for the magazine.

According to Remodeling, the top five remodeling projects in 2004, ranked in the order of percentage of cost recouped at a home's sale, included minor kitchen remodel (92.9 percent of cost recouped), siding replacement (92.8 percent), midrange bathroom remodel (90.1 percent), deck addition (86.7 percent), and midrange bathroom addition (86.4 percent).

The figures can vary greatly based on the housing market in your area. When housing prices are rising rapidly, remodeling costs can be recouped faster. In addition, if your remodel simply catches your house up to the others in your neighborhood - say, adding a third-car garage to your home when all other homes in your neighborhood already have the same - this type of improvement could actually recoup more than the cost.

The question of how much to spend on remodeling could also depend on whether the changes could be categorized as maintenance or remodeling. Maintenance improvements would be things like replacing the roof, carpet or repainting.

In addition, maintenance projects that focus on energy efficiency may have an even quicker payback than standard remodeling. Replacing windows, adding insulation and upgrading to more efficient air and heating units are good examples.

It may also be important to consider how much enjoyment you will get out of the improvement. A home office, pool or gazebo may enhance your family's quality of life, but experts say these are examples of remodeling projects that rarely give anywhere close to 100 percent payback at resale.

Finally, make sure that your own homeowner's dwelling insurance is raised to include the value of the newly remodeled house as the work is completed.

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