When homeowners are considering a remodeling project, the question “What will it be worth?” is one of the foremost for many. The idea that the work is in many ways a real “investment” has served as great comfort to folks as they write the check for Draw#1. Things have changed though, at least for now.
While I know that the prevailing sentiment is that things have certainly changed for the worse in all things real estate related, I prefer to look at the bright side. I don’t say so easily either, I’m certainly among those who would be considered “severely” impacted by the market shift. But that’s another story.
Before getting into the bright side, let me explain a little bit about how people have gone about determining value in years past.
Cost vs. Value Report
Remodeling Magazine publishes an annual report called the “Cost Vs. Value Report“. The report goes to great lengths to help determine what the resale value of a project is in different markets nationwide.
They do this by providing specs for a typical project, such as a Bathroom Addition, to remodeling contractors in each featured market for the given year. The remodeling contractors provide cost estimates, based on the prescribed specifications.
The researchers also provide the same specs to a selection of local real estate professionals, including appraisers and real estate agents. It’s up to this group to review the project and give an estimate, based on their own experience, as to what the project will be worth.
A Great Sales Tool
This Cost vs. Value report is widely used as a sales tool, or at least it was when values were a little stronger. A home improvement seller such as a general contractor, a window replacement firm, or a siding company, would show the prospect in black and white what they could expect to get for the work if they sold the day it was finished.
Siding has always been strong for example. So the siding contractor shows you a report published by a national magazine, an apparent expert on the market, which clearly shows that you will recoup 90% of your investment. I know that any decent salesman would add the line “and that’s if you sell today! Clearly it will be higher in a year from now as the house overall appreciates.”
I know, because I’ve said those exact words, though I never used the report.
Average Cost Per Square Foot
This is the resale value method I always used when a client asked me “What will it be worth?” My answer was fairly boiler-plate and it went like this:
“Well, it seems that the houses in the area are all going for about the same price per square foot. I’m no expert on value, but It stands to reason that if we make your house 500sf larger, then you can just multiply out that number to get a decent estimate of the value.”
This worked fine for me because I was selling room additions for the most part, and reading it now, it makes perfect sense. In a predictable world that did what it was supposed to do, it would still make sense. But it doesn’t; not today. Not for now.
The Mental Cost Reduction
The purpose behind all of this is what I think needs to change. I think way too many people, on the professional side, and on the consumer side, were focusing much to strongly on the investment value of a home improvement project.
The homeowner sees an estimate, say it’s $100,000.00. That’s a whole lot of money! “Maybe I don’t want to spend $100,000.00” they think. But they want that space, there must be a way to make that make sense. And this is where resale value of remodeling comes into play.
What if the client believes that they will have $100,000.00 in value from day one. Then how much are they spending? Zero, right? It’s no longer an expenditure, now it’s a transfer of funds from one place to another. Why not put it in the house where we can enjoy it?
The same would apply if the report shows them that the value will be $75,000.00. “Well, at least this is only costing me $25K, the rest is real value.” Makes perfect sense, right? Not today. Not for now.
Borrow, Borrow, Borrow
This actually could make some sense, even today, for those buyers paying cash. I’m among the majority who still hold out hope that real estate values will, eventually, bounce back and return to being an asset that appreciates, rather than one that drops in value, like a rock.
But the idea of borrowing based on these estimates of resale value seems very misguided to me at this time. Which brings me to the good news.
The Bright Side
Remember me saying that I wanted to look at the bright side? I bet you were starting to forget there was one! I know I was. My own writing was depressing me! I wonder if that means I should do some editing?
But the good news is really good news.
If we all wake up from this hypnotic trance where our homes are our “biggest single investment” and consider them as HOMES, not investments, I think we’ll start making much better choices. Much better!