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The Excess Renovation Trap

Before considering what's worthwhile to do and what's not, let's spend a moment considering home appreciation. I was just talking up with a neighbor who's spending $200,000 on the finest in home upgrades. She comes right out and says that she knows she's over-doing it for the neighborhood. But, then she says, "I just hope that prices will go up until I can get my money out when we are ready to sell."

This is an argument that most people use to justify over renovating their home. Prices of properties are going up, so they will eventually be able to get their money out. It's important to understand that this argument makes absolutely no sense.

If prices of real estate in your area are going up, then they are doing so whether or not you renovate. The renovation doesn't make the prices go up; the marketplace competition for homes does. Yes, a renovated house will tend to sell quicker and for more money, but it will do so at every price range. What drives prices higher are fewer homes or more buyers for a given neighborhood, supply and demand.

For example, your home is worth $500,000 and you put $100,000 in renovation into it. Now, is it worth $600,000? Perhaps it is. But what if your neighbor next door who has the exact same house, but did no renovation at all, can sell for $580,000? How much did your renovation add to the value of your home and how much did market appreciation add? The answer is the market forced it up $80,000 and your $100,000 of work added an additional $20,000 to the home's value -- just a 20-percent return.

In the home we owned before we purchased the one we are in now I spent 15 years of labor and $30,000 in materials to upgrade the home. I did not plan on moving and I did not do excess improvements. I did it the way I wanted it; upgraded the bathrooms and kitchen, added a patio, a new 90+ furnace / AC combo and a new 2 1/2 car garage along with a lot of little stuff. If I had contracted out all the work instead of bits and pieces I would have easily spent a 100 grand.

When we sold the home in 1995 the gross sales price was $70,000 more than we paid for it. We set a new high price for the neighborhood. Less the 30K I spent, I made about a dollar per hour for my time. Had I spent the 100K or more hiring it done I would have lost big money.

Two years after we sold, un-improved or minimally improved homes in the same area were selling for about the same price we sold for. So don't ever confuse market appreciation with investment return. It's a mistake to believe that prices going up financially justifies doing expensive work on your house. Prices might go up even if you didn't do the work.

If you honestly do care about the value added to your home by a renovation project, you should do a careful evaluation before you start to see just what the figures are. That way you can accurately put a price on the two factors: financial and personal. This is especially true if you must borrow the money to do the improvements.

No matter how much a home owner protests that he or she doesn't care about values and is only doing renovation work to satisfy their self, I've never met anyone who liked to lose money on their home. Yes, renovate to make your home more comfortable and livable. But keep in mind that a home is also an investment, one on which you'd like to make a profit.

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