Alter Eagle Construction
Making the home town carpenter a reality
Alter Eagle Construction & Design
Cost vs Value
Note: I only gathered the data for the San Francisco Area
A FEW MONTHS BACK, A POTENTIAL CLIENT CONTACTED Cincinnati remodeler Ron
Roell. The homeowner, a single woman living alone, wanted Roell to reconfigure her
three bedrooms into a master suite and an office. Friends with whom she'd discussed
the idea pooh-poohed it. Tearing out the wall to reduce two bedrooms to one would
seriously hamper efforts to sell, they suggested. Few buyers in Cincinnati seek two-
bedroom homes. Roell asked the woman how long she planned to remain in the
house. Answer: Ten years. He advised her to proceed If you're going to be in a house
less than five years, then you need to weigh resale value in contracting for a
remodel," the contractor says. "Not heavily, but take it into consideration. If you're
planning to live in the house long-term, who cares what somebody else thinks of it or
what they'll spend for it? You're not selling it anyway."
Today, the woman couldn't be happier.
Roell says there are two opposite ways of looking at remodeling and home sales:
Remodel with resale value totally in mind or remodel with resale value as absolutely
irrelevant. Kermit Baker, director of the Remodeling Futures Program at Harvard
University's Joint Center for Housing Studies, says for most remodeling customers,
return on investment remains part of the equation. The question is, how big a part?
"My guess would be they (clients) undertake most remodeling projects because those
projects meet their lifestyle needs," Baker says. "But they're concerned about getting a
reasonable payback, if they're planning to sell soon."
Tie to home sales
Last year, both existing home sales and spending on home improvement reached
record levels. Home resales totaled 5.2 million, sending ownership rates to historic
highs. Remodeling also surged. Figures released by the U.S. Department of
Commerce, tracked by its C-50 survey, show home improvement expenditures up 7
percent in 1999, to $142.9 billion. Seventy percent of remodeling dollars went to
improvements such as additions or kitchen and bath remodels. The other 30 percent
paid for maintenance and repair, such as painting or re-roofing. This year, economists
from the NAHB expect the volume of remodeling to hold "reasonably steady," despite
a roughly 10 percent decline in sales of existing homes, to a projected 4.75 million
Real estate agents and appraisers interviewed for this article agree that a jump in
mortgage interest rates-from 7.4 percent to 8.5 percent-contributed to the dampening
effect on sales. Real estate pros also report that even if sales are slower, they continue
to qualify as robust, with buyers outnumbering sellers in most markets. In Newington,
Conn., a working class suburb of Hartford, homes turn over in less than a month. "Most
anything on the market two or three weeks is junk or overpriced," real estate agent
Vince Lapenta says. In Houston, real estate agent Irby Rozelle says the situation, a
frenzy last year, is "much more stable today," with prices continuing to rise (his
estimate is 15 percent to 20 percent annually) and inventory "poor in both quantity and
quality" due to demand. For real estate agents in these and many other markets, the
difficulty today is getting the listing, not the sale. And a strong resale market, Larry
Murr, a Jacksonville, Fla., contractor, notes, "bodes well for us," meaning remodelers.
When consumers first buy a house, Murr says, "that's a typical time for people to call to
have something done." His company, Lawrence Murr Remodeling, is renovating three
homes that recently changed hands. The first is a complete interior restoration and
master suite, the second, a complete interior restoration with a deck addition, and the
third, a whole-house remodel.
Cost vs. value
What does a remodeling project bring back at resale? That's the question Remodeling
sets out to answer with its annual Cost vs. Value Report. Cost vs. Value lists the results
of interviews in which real estate professionals are asked the percent of cost they think
would be recouped on a given remodeling project if the house was sold within a year.
This year's survey covers 10 projects: bathroom remodel, bathroom addition, exterior
painting, two-story addition, family room addition, minor kitchen remodel, master
suite, sunroom addition, basement refinishing, and re-roofing.
Responses from 300 respondents in 60 markets indicate that popular projects such as
kitchen and bath remodels remain a solid investment for homeowners. Of the 10
projects on the list, respondents rate the minor kitchen remodel-changing out flooring,
countertops, and cabinet faces, adding a wall oven and cooktop, and re-painting-as
most likely to return value for cost. According to respondents, what Maryland-based
construction software publisher HomeTech estimates will cost $14,847 would retrieve
some 88 percent ($13,138) of its cost back in today's strong resale market. Respondents
rated the two-story addition-a two-floor annex of family room, bedroom, and full bath-
estimated as costing $67,743, second most valuable. In their view, it would bring back
84 percent, or $56,770. Least return? A toss-up between roof replacement and the
sunroom addition, both estimated to generate 60 percent of initial cost if the house
was sold within a year.
Good bones + extras
One of the things that makes quality remodeling so valuable is that buyers in today's
resale market want a home in move-in condition. Traditionally, it's the kitchen and
bath-the two rooms most used and most subject to the whims of fashion-that turn
buyers on or send them walking. But when buyers outnumber sellers, and inventories
remain lean, the equation changes. "Improvements count for more now than they do
in a sluggish market," Fort Worth, Texas, appraiser William Durham says. "Buyers are
ready, willing, and able to spend more on the extras that differentiate one house from
another. In a hot period, you ask a premium for those things. And get it, or close to it."
Durham says today's buyers also look for "good bones," which he defines as a house
with sound structure, one with potential for changes in flooring or cabinetry, "houses
that have real strength in their floor plans or design features."
Others agree. Though curbside improvements such as landscaping, fresh paint, or a
new roof lure buyers inside, it's what they see when they step in the door that often
makes or breaks a sale. "Most of the homes around here are similar," Kathy Shirley, a
Jacksonville, Fla., real estate agent, points out. "And it's the ones that have been
renovated that will sell before the ones that have not."
In the San Francisco Bay area, the scramble for real estate-"a lot of cash chasing
limited property" is how one real estate agent puts it-has buyers bidding on houses
and brokers auctioning them off. In San Francisco, a seller's idea of a soft market is
getting 10 bids on a house instead of 20.
A few months ago, a 1,700-square-foot house on real estate agent Bill Graham's street
came on the market for $1.2 million. The price didn't shock neighbors, and certainly
not Graham. "Anything that's anything is over a million dollars," he says. But the real
estate agent and his neighbors were somewhat taken aback when the house was
snapped up for $1.8 million. He guesses the buyers were people who'd already bid on
four or five Bay area properties, got shut out, and decided to offer that much more
than anyone else.
"I would guess that 70 percent of properties (in the Bay area) are selling over the
asking price," Graham says. "The market strategy is to price the house so it elicits the
biggest number of offers above the asking price."
Small wonder, then, that of the 60 markets surveyed, the return on investment for
remodeling projects in the Bay area far exceeds all others. Real estate professionals
there estimate an $18,928 kitchen makeover would bring back $27,800-or 147 percent.
A $12,604 bathroom remodel would yield $19,100-152 percent-on resale. A $61,084
family room addition would fetch $91,000-149 percent. "There is so much cash there is
no fear of major remodeling," Graham says. Baker of the Harvard Joint Center says
data his group has seen shows the Bay area-stretching from Marin County to San Jose-
is the country's hottest remodeling market. The run-up in real estate prices has
launched a home improvement scramble. "The challenge in San Francisco now is to
find a block that doesn't have a Dumpster on it," Graham observes.
But for both remodelers and homeowners who are selling, this seemingly perfect
situation has another side. Graham estimates it takes a year and a half for a good
remodeling company to get to a project-if the consumer is lucky enough to find one
available at all. From a value-returned standpoint, the improvements people make can
become a moot point as Silicon Valley dot-commers, eager to turn stock options into
more substantial assets, buy any standing structure and tear it apart for rebuilding.
Where and when
In more typical markets, remodeling's return on investment takes into account the
value of the home, its value in relation to the neighborhood, and the neighborhood
itself. Overimprove is a word real estate agents use fairly often. It's also one
remodelers don't like to hear. Overimprovement happens when homeowners end up
spending far more on a remodeling project than they could ever hope to get back in a
resale. Example: the $75,000 kitchen remodel which is an excellent investment bet in
a neighborhood of half-million-dollar homes, yet a clunker in one where homes are
valued at, say, $100,000. On the other hand, big-ticket home improvements are not
strictly for the well-to-do. Remodeling smaller or less expensive houses not only adds
or improves square footage but it can boost resale price.
"If you live in a 1,000-square-foot house and finish the basement, that gives you lots of
additional square footage," Columbus, Ohio, appraiser Charles Pavey notes. "If you
have a $300,000 house and a family room and all those bedrooms, you may not get as
great a return."
As a rule of thumb, the better the house and neighborhood, the more value a remodel
returns. It's hard to "overimprove" good houses in good neighborhoods at excellent
locations. Provided, of course, quality work is done. "Unless it's done right and done
by a professional, it sticks out like a sore thumb," Lenoir City, Tenn., real estate agent
Margaret Fraser says. Potential home buyers interpret poor construction or design as a
warning of things to come. "If you think there's the potential for one thing to be wrong
with the house, immediately you start to imagine what else could be wrong," Fraser
Low hassle factor
If real estate agents and appraisers cite a single trend among today's buyers, it's the
"no hassle factor."
"People are busy," appraiser Charles Pavey says. "They want to hang their pictures
and prop up their feet. They don't have the time to fix or repair things. Or they'd rather
be doing something else." Buyers, Pavey says, "would rather pay for it to be the right
Real estate agent Cecily Bliesath finds much the same scenario in the upper-end
Detroit suburb of Birmingham, Mich. Recently, Bliesath was escorting a 35-year-old
client through a house listing for $359,000 that needed new paint, new carpeting, a
new kitchen, and new bathrooms. The house, she told her client, "would be a great
buy for somebody willing to do the work." The client, an engineer who works in the
auto industry, told her that "if this was five years ago, I would've jumped on it." Today?
Too busy. He bought a similar-sized house that "was beautifully fixed up," Bliesath
recalls. And cost more than half a million.
"A lot of it comes down to convenience," Indianapolis-area real estate agent Dan
Moriarty says. "People want a very low hassle factor today as compared with five
That "no hassle factor" drives sales of town houses, Des Moines, Iowa, realtor Ray
Dennis points out. "The other day, a builder told me he's building smaller houses with
a lot of bells and whistles," Dennis says.
"Either detached or town-house-type units on narrow lots. Because baby boomers are
getting older. They don't want to be bothered doing yard work. They want
convenience and all that electronic stuff." The shape of housing to come, he observes,
is much "like the way cars have gone." l R
I included the lead in article in it's entirety, but highlighted the areas of interest in black.
For different areas of the U.S. see the original atricle (link up top)