The Dangers In Over-Improving a Home and How to Avoid Them
Our listing clients often ask us which home improvements provide the most bang for the buck when it comes time to sell. We always remind them that the market value of a home – what it will sell for to a willing buyer – is in large part determined by the sales prices of similar homes in the neighborhood, and surrounding neighborhoods.
Professional appraisers use the principles of regression and progression when considering the value of homes. The value of a large home (or one with major improvements), located in a neighborhood full of smaller, unimproved homes, will be dragged down by the smaller homes using the principle of regression. Conversely, a small home located near lots of larger homes will see its value increase, when the principle of progression is used.
The principle of regression is important to keep in mind when considering improving a home to ready it for the market. If you improve the home to where it becomes the best home on the block your return on investment for those projects may be subsumed by the loss of value.
A good first step is to get clear on the home’s current market value and we’re happy to help you there, at no charge. While compiling the market analysis we’ll learn what nearby homes are selling for, which is valuable information when you’re thinking about various renovations you’d like to make.
Now you know the starting value, before adding improvements. Remember, when determining which improvements to make, in the end, the home will only sell for the maximum sales price of similar area homes.
The next step is to figure out which improvement projects will realize the largest return on your investment, without putting you over the neighborhood’s threshold. The addition of an attic bedroom, for instance, will net you a 77.2 percent return on investment (the national average), according to Remodeling Magazine’s annual Cost vs. Value Report. If that return is higher than the market will bear, it’s an improvement you don’t want to take on.
Since kitchens sell homes, a minor kitchen remodel may be worth the 79.3 percent ROI, but skip the major remodel with its 67.8 percent ROI, unless you’re selling a luxury home. In other words, don’t create a million dollar kitchen in a $300,000 home.
Choose your improvement projects carefully, get several bids for the work, know the highest potential sales price you’ll realize and you’ll avoid the danger of over-improving the house.
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