The following is an excerpt from our book Shut Up And Flip A House Already: A Guide to Help You Shit Or Get Off The Pot. It is geared toward house flippers, however the logic applies for homeowners taking on any renovation.
To the beginner house flipper or homeowner doing a renovation, it may seem like an arduous task to determine what to update in their home. It is not. Knowing what to update is as easy as knowing what similar houses in the neighborhood look like and what features are expected by buyers. Simply look at your comps, the homes with which buyers and their agents will compare your finished home, and determine from there what your home needs.
If the higher priced comps have beautifully remodeled kitchens, and you’re looking to sell for top dollar, then yours should have a beautiful kitchen. These comparable homes show exactly what sells in this neighborhood. Don’t try to get by with something cheap to save money thinking you know better than the comps. You won’t fool anyone.
For instance, you may look at some cabinets and think, “Maybe I could get away with painting these cabinets instead of replacing them.” Maybe you could. If you are in a neighborhood where that is acceptable and homes with painted cabinets sell, then go for it. If homes in the target price would never have painted cabinets, then you know your answer. Don’t do it.
This is how you know what to update.
Look at your home in a side-by-side comparison to homes you want to emulate.
Determine what they have that yours does not.
Price that out.
Determine if these updates fit into a budget that will allow you enough in profit.
Kitchens may be easy. The HVAC system and roof may be another story. Or is it? Let’s walk through some scenarios to show you how we think these things through.
Q: Should I replace old wood windows?
Look at the comps. Drive up and down the street. Even better, if there’s a home for sale in that neighborhood (especially if there’s an Open House!) - go check it out for yourself, all up-close-and-personal-like. Do most homes have replacement windows? Do buyers in this neighborhood expect replacement windows or do they love the charm of the older wood windows? Agents who do a lot of sales in the neighborhood would be a great resource to answer some of these questions as well.
Q: Should I replace a gas furnace that is 12 years old and working?
Unfortunately, sometimes you just have to take an educated guess. For instance, according to Google, gas furnaces have a lifespan of up to 20 years. Your furnace is older, but working. Your comps make no mention of newer furnaces. Your agent says that in their experience, the buyers they’ve worked with in that neighborhood haven’t bought a home solely because of an updated HVAC system. It’s nice, but not necessary.
A: Don’t replace it. Have a qualified professional come out and inspect it, clean it and do any necessary maintenance. Offer or buy a home warranty. Done. Unless….
A2: If someone comes out to do some maintenance that is going to cost $400 but a new furnace will cost $800….well now. Things are looking interesting. Adding a new furnace will only be an added cost of $400 above maintaining the old one. If you add one, you can then boast “New furnace” on your marketing material. You have room in your budget for this (or you’ll make room). You go for it. Tear it out.
Q: Should I replace a roof if I don’t know how old it is and it has two layers of shingles?
This is tricky. Sometimes you have no idea how old something is and if it is functioning properly. You see some water spots in the house from what is likely a leaky roof, but are they old spots that just weren’t painted over? Were the spots from before the second layer of shingles was added? Your inspector or contractor can’t tell either but they might be able to guess. The only way to know is to see it when it rains. It’s not raining and you have to put in an offer to buy today.
A: In this case, assume it will have to be replaced. Many times you don’t have the luxury of waiting to find out the answer you need. You’ll have to make due with your observations and err on the safe side. If you don’t need a new roof then good for you! Money saved.
Clear as mud? Let’s make this even more confusing.
This is where it gets trickier. As a flipper your brain starts to think, “How can I make even more money on this house? I know, I’ll add a deck. Everyone likes decks.” Come on now. Simply adding things does not automatically add value. There is no hard and fast rule that if you add X feature, you will get Y return on your money. We know they show you this on TV.
It is a lie.
Wendy asked one of her Realtors, “Do you think a deck could boost a home’s value?” their response was, “In general, yes. Or so we are taught. A wood deck, when done correctly, usually has a higher ROI (return on investment) than other improvements.”
Aaron Binik-Thomas is a go-get-em, super Realtor with Keller Williams in Cincinnati. He’ll try just about anything to market a home, within reason of course. No shady business! Prior to becoming an agent, Aaron was a sales person for a local wholesaler. His previous experience selling fixer-uppers has helped him to be familiar with many neighborhoods, allowed him to evaluate many crappy houses and taught him to know what features are good to add to homes to increase value and saleability. Aaron knows that not all houses and neighborhoods are created equal, though. In general, yes, a deck will bring a higher return. Is that always the case? No. Had we taken this information out of context, we might believe that this seasoned pro is telling us that all decks are a good idea for a house and one should always add a deck. Be careful what information you digest from the TV. Entertaining programming does not always equal the whole truth.
Value is in the eye of the buyer.
The buyer is going to rely on comps. Any additions you bring to the home will bring you one of these three things: added value, saleability or a loss. Let’s break this down.
Actual Added Value
Only some updates will bring value above and beyond the current possible sale price to your home. You can’t add just anything and expect it to boost your sale price. The only things that add value to a home are square footage, increased number of rooms and bonus spaces.
Increased square footage could mean adding an addition to your home, of course. Another way to add square footage would be to finish the basement in a home. An unfinished basement is not counted as square footage since it is not a livable area of the home. So, finishing it off could significantly add to your square footage without changing the existing footprint of your property.
You could increase the number of rooms in your property without changing the square footage. Below are some examples.
Turning a pantry into a half bath.
Taking one large bathroom and breaking it up into two bathrooms, thus increasing the number of full baths in the home.
Taking over a dining room to create a third bathroom.
Clearly some of these may be detrimental, such as in the dining room example. If dining rooms are important to buyers in this area, then this is not a feasible option. If you were able to relocate or add a dining area in another part of the home, then win-win. If your home is in an area where the buyer couldn’t care less about a dining room, then you’re good to go.
Finally, you can add value by adding bonus spaces. This might be in the form of a garage or deck. They won’t add to your square footage or room count, but the increased functionality and desire for the home is at work here. If in your neighborhood, some of the houses have garages, but yours does not, then your house would only compare with the houses without garages. Adding a garage to yours will simply bring your home’s value up to the same level as the homes with garages.
Going back to the deck, let's look another scenario. Let's say that the homes on one side of a street have a beautiful view and the homes on the other side do not have a view at all. Add a rooftop deck however and now a home without a view suddenly has this desirable feature. This home is now more comparable with the homes on the view side and thus will align more so price wise with those homes. There are other variables to consider, of course, but you can now see that the new rooftop deck home's value will inch up closer to the higher price point.
Some upgrades will never add value no matter what you think. Wendy was once asked by a family member, “How much did this water feature add to my home’s value?” She was sorry to report that the answer was ZERO. It didn’t increase the value of the home at all. What it might add is saleability, making the home more attractive to potential buyers. But, it did not add square footage or increase the number of rooms or bonus spaces.
Things that increase saleability are a bonus and not the norm for the neighborhood. Perhaps your home has a more beautifully manicured lawn or a larger than average pantry. These things do not meet the value adding criteria, but certainly do add saleability. Buyers may swoon at these features, but they won’t pay more. They’ll just like your home more than some of the others. Sellability really helps with moving your house quickly with fewer days on the market.
Loss in Value
We’re sorry to tell you, it isn’t just as easy as adding stuff and counting your profit. If you take 3 bedrooms and create 4 smaller bedrooms, you may have just shot yourself in the foot. Conversely, taking 4 small bedrooms and converting them into 3 bedrooms, one being a master suite with a walk-in closet, may actually work in your favor. It all depends on what buyers in your neighborhood love or expect.
Some upgrades may not lessen your home’s actual value, but will affect the perceived value. For instance, in Ohio, pools can only be used a few months of the year. In many neighborhoods, pools are seen as a maintenance nightmare; thus making the home less attractive, not to mention they come with increased liabilities. Some lenders will even require a homeowner to purchase more insurance if the property has a pool. Here is a big bummer: you add a $30,000 pool and it actually makes your home less attractive. You’ve just spent a ton of money on something people don’t want. Loser.
Disclaimer: we’re not saying water features or pools are always a negative. It all depends on the neighborhood and comps! In some areas, like Phoenix, pools are an attractive feature. In others they are a hindrance. Know your customer, people.
Do Some Math
Now, take a common scenario and do the simple math...
Let’s say homes with a garage in your target neighborhood tend to sell for $10,000 more than similar homes without them, then that is how much value you will bring to your home by adding a garage. If adding a garage costs $5,000, then BOOYA. Build a freaking garage. That’s a 100% ROI on the garage.
There is no magic number. The next time you see someone spouting off that renovating your kitchen will add $15,000 in value to your home, call BS. Do not take this at face value. Now you know that determining value adds is a process of researching surrounding properties, not hard and fast rules.
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