How Much Is Too Much on Home Improvements?

Bankrate.com
Nearly every homeowner has a wish list. Perhaps you'd love to:
  • Rip out and replace that hideous green carpeting the previous homeowners must have purchased to match the front lawn,
  • Build a walk-in closet so that every pair of shoes, every shirt, every suit has its place, or
  • Add a double-decker, wraparound deck so that entertaining can spill outside.

In any case, one thing's for certain: Crossing off any item on that wish list comes at a cost. And as projects snowball -- and home improvements inevitably do -- you may start to wonder if it's all worth it.

Considering your home's worth is one way of answering that question. On average, don't put more than 20 percent of a home's value into improvements on the home, most industry experts say.

"I've always been hesitant to endorse averages because every house has its own story," says Gregg Hicks, director of marketing for Reliableremodeler.com. "If you simply use a percentage model, you might be shortchanging or over-extending yourself, depending on your situation."

     
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From the age and condition of the home to what the Joneses of the neighborhood have done, there are a lot of factors to help in deciding how much work may be necessary and, likewise, what would be considered going overboard. Still, Hicks says a rule of thumb on how much to spend can be a good starting point.

In fall 2006, Dan Fritschen, author of "Remodel or Move?" and founder of a Web site by the same name, surveyed 5,000 homeowners who were considering that choice. Half of those were planning plan to remodel and expected to spend 30 percent of their home's current value on the project. In a similar 2005 survey, one-third of respondents planned to remodel and planned to spend the same percentage of home value.

Relative values

So what does it take to get a thumbs up on improvement spending from the experts? Neighborhood knowledge. Consider the highest priced home as a limit.

"You can improve up to that level," says Fritschen. "Going over that should only be done if you don't want to recoup the majority of your remodeling investment by your home appreciating." In other words, you'd better enjoy that fourth bathroom and natural stone-surrounded pool with waterfall if nearby houses have no such amenities.

Or, as Becky Nelson, senior loan officer for Opteum Financial Services, puts it, if you want $50,000 in custom landscaping while your immediate neighbors are struggling to mow their lawn, that's fine. But when you move, you're not getting the $50,000 back. Nelson adds that in the mortgage world, that over improved house would be considered "the castle of the neighborhood." You'd be hard-pressed to find a buyers' agent that recommends purchasing the neighborhood castle -- or a house that sticks out in any obvious way.

As for the work-with-what-you've-got-or-build-an-addition decision, consider a calculation from Dean Bennett, president of a Colorado-based design and construction firm, who says adding square footage often makes good sense. Here's a dollars and cents way of looking at it: Divide the total cost of the addition by the number of square feet added and then compare that number to the cost per square foot of what homes in the area are selling for. For example, a $75,000 addition of 400 square feet would cost $187.50 per square foot. Compare that figure to the price per square foot of recent sales of comparable houses in the neighborhood.

This type of calculation is something bankers will do when a homeowner is applying for a loan for an addition, Bennett explains.

Still, he adds, "Determining if a home improvement project is worth it is more often about making things more livable for the homeowner." That's an intangible, of course. Will a more convenient and nicer bathroom make the house worth more, in the perspective of the homeowner and/or a potential buyer? It's hard to say.

Long and short of it

How long one intends to live in the house does make a big difference in terms of how many improvements should be made.

Nelson sees two groups: homeowners with no regard to neighborhood or community environment because they can't imagine selling, and homeowners who make improvements based only on neighborhood/community environment so they can sell within five years.

It's important to keep in mind, Nelson cautions, that given today's market, homeowners who have to borrow the money for an improvement project may have a tougher time doing so. "Underwriting guidelines are becoming more stringent everyday right now in the residential mortgage market because of the massive amount of foreclosures and/or short sales happening around the country. Therefore, if you need to borrow the money by attaining a renovation loan or a home equity line, expect the approval process to be a bit harder than it was even one year ago."

Regardless of whether the money comes from savings or from a loan, make peace with the fact that an instant and equal boost to your home's value won't happen. "There is nothing you can do to a house that is immediately going to get you back dollar for dollar what you spent," says Don Zeman, builder, contractor and host of the radio show "Homefront." Take a kitchen renovation, for example. "If you enjoy it for 10 years and it appreciates, maybe you've made a little money on that investment. If you sell the house tomorrow, you're not going to get your money back."

Or, say you're in the market for a new furnace. A sky-high efficiency rating is going to cost more upfront, but over the years you'll save more. Planning to sell within the next year? Then a lower-efficiency furnace may be best.

For those planning to stay put, craftsman Bruce Johnson, author of "Fifty Ways to Save Your House," points out that one never really knows what may happen. "We're a rather mobile society these days. Job transfers come, we move, nothing is certain. I, myself, would be very careful about not over improving my house to the point where it would be impossible to get the money back out of it."

That's precisely why experts recommend sitting down with a real estate agent before doing costly home improvements. Which projects will increase the resale value? Which ones would make the house tough to sell?

For homeowners uncertain about whether moving would be more cost-effective than taking on improvement projects at all, check the free online calculator at Remodelormove.com.

If selling seems most logical, think in terms of what improvements are necessary for resale (i.e. correcting water, mold or pet damage) and what will help prospective buyers see the house in the best light (i.e. repairing a squeaky door hinge), says Jim Rocchetta, national marketing director of Handyman Connection, which maintains a network of more than 4,000 independent craftsmen.

Regardless of whether staying or moving is the plan, licensed contractor James Carey, who hosts the nationally syndicated radio program "On the House" with his brother Morris, advises a common sense approach to ensure that selected improvements are worth it.

"You don't go out and remodel your kitchen if the exterior of your home is cracking, if your lights are flickering, if you have evidence of termites, if your roof is leaking," Carey says. "You take care of the maintenance aspect of it first. Protect your family, and then protect your pocketbook."

That includes knowing when to stop adding extras to your home. "The bottom line is, you can overbuild a house," Zeman says. "You don't ever want to end up with the biggest, most expensive home in whatever area of the city you live in."

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