There are many things to consider when renovating a home. What should I renovate to get the best return? Wall colours, flooring types, cabinet styles…The list goes on and on. There are also a few simple rules that need to be followed. Doing a great, professional job is among them, but the single most important rule is “Do not over develop”.
Here is an example that will illustrate my point. The current market value of a house is $400,000. The owners decides to do a complete renovation of the home. New roof, new windows, new mechanical, new kitchen, new baths, new flooring, new lighting, new baseboards, trim and doors are all on the list of things the owners wants to do. The budget for the renovation is $130,000 dollars.
After the renovation the owners have a beautiful home and they lists the house at $570,000, hoping to gain a profit and get paid for the hard work, time and effort of renovating. The house sits on the market for months with very little interest and they finally have to take it off the market or lose money on the endeavour. What went wrong?
Before the renovation begins, the owners should have researched to find out what the market value of the house will be when the renovation is complete. If the completely renovated house in their neighbourhood has a market value of $500,000, the owners will be out $30,000 in equity for the house and they gain nothing from the work that was completed. There is a difference between the cost of the renovation and the value of the renovation.
I know this does not seem fair, but it is one of the realities of the real estate market. Cost and value are independent of each other in the real estate market. There are definitely situations where cost is lower than value. Those are the properties that people who flip houses search for. It is a very competitive market for those homes.
I have seen a similar over development and wasted renovation dollars in neighbourhoods where there is prevalent infill redevelopment. Home owners, knowing properties in the neighbourhood are in high demand, will renovate their home to try to maximize their return when they sell. They might do a few simple updates like a fresh coat of paint and some new carpet and maybe even replace the worn-out roof. They might spend anywhere from $5000 - $15,000. At the time of sale, they end up getting a similar selling price to the neighbour who did not renovate before they sold.
Why did this happen? Because the highest and best use for the property is redevelopment. Properties are being purchased in the area for the value of the land and the condition of the home has little effect on the value of its highest and best use.
My best advice for people who want to renovate is to understand the context of the market and know the market value of a property before a renovation begins. Then be sure to understands how the renovation affects the market value.
Don't assume that a there will be a profit for a renovated property or even a 100% return on the renovation dollars spent. In Calgary, generally, the closer to the core you go, the more valuable a renovation is, except in neighbourhoods where the highest and best use of a property is redevelopment. But even in neighbourhoods where this is true, certain properties can still benefit from renovating because not every property in those neighbourhoods has redevelopment as its highest and best use.
You might be asking a few questions after reading this.
1. How can I avoid over developing my property?
Engage the services of to a real estate appraiser to learn what the property is worth now and what it will be worth once it the renovation is complete. This may cost a few hundred dollars, but in the end, it could save thousands. As an alternative, If you are planning to sell after the renovation, get advice from a real estate professional like me who can explain the market and help you make some decisions.
2. What should you renovate to get the best return?
That is another blog topic to come. That really depends on your house and what it needs. Generally, I would say that the roof, windows, siding and mechanical should be your starting point. If all of those are OK, the rest depends on your budget. Some house flippers just do cosmetic changes (Commonly know as lipstick on a pig) and seem to profit. I like to steer my buyer clients away from these properties unless they are willing to take on the big ticket costs after they buy.
Feel free to contact me if you have questions. If you are renovating to sell, I would be happy to do a walk through of your home and advise you on the best place to spend your money to get the best return on your renovation dollars.
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Jim Perks is a REALTOR in Calgary, Alberta, Canada. He uses his expertise in Internet marketing and real estate experience to service both buyers and sellers throughout the city of Calgary. He can be reached at RE/MAX Real Estate (Mountain View) 403-247-5178 or by email at email@example.com. His website is www.calgaryrealestateagent.ca
Jim Perks is a Calgary REALTOR who divides his time working with both sellers of houses and buyers of homes. He has been an agent since 2010