When you fix up a house, it is important you spend your money where it will add the most value. As an investor I do not want to make repairs that will cost me more than the value they will add to the home. If a new kitchen will add $5,000 to the selling price, but will cost $10,000 to put in, I do not want to replace the kitchen. People who live in their homes may have a different strategy because they really want a new kitchen, and know they will be living in the home for another 20 years. Even if you live in a home you want to make smart decisions about how much you spend to fix up your house and what you fix up or update. I have seen people spend a lot of money on things that added no value to their home like an outdoor pool in Colorado. If you must have a pool and do not care about the return on investment, great. If you want to spend money on things that improve the value of your home you have to be careful.
How do you know how much a repair or update will add to the value of a home?
There are some house flipping shows that will give a value added for every repair made:
- $2,000 spent on the bathroom, value added $5,000
- $10,000 spent on the kitchen, value added $15,000
It would be awesome if we could tell exactly how much each repair or update adds to the value of a home, but you cannot. You have to look at the house as a big picture and not the individual repairs. There may be some cases where you can tell exactly how much something will add to the value like a garage or adding a bedroom, but updates and repairs are tough.
A home that is nicely updated will sell for more money than a home that has bathrooms from the 1970’s. A home with new carpet will sell for more money than a home without. A home with new paint will sell for more money as well. It is really hard to quantify what those individual items add to the value, because every house is different and will have different levels of updates and repairs. Rarely do you find two houses that are exactly the same, let alone two houses that are exactly the same, sold recently, and had one update done while the other did not. I consider what repairs we have to make to compete with similar houses in the neighborhood that are selling for the price I want to sell for. If I only do a couple of updates to a house and try to sell it, it may not come close to competing with other houses in the area. The house may sell for $20,000 less than the other house that is completely updated. But if I spend another $5,000 updating the home to make it as nice as the competition, I may get that extra $20,000. I usually try to make as many updates as I need, but not too many.
How do the repairs you decide to make vary based on the area?
More expensive homes will require more expensive materials and fancier designs. It is easy to overspend on repairs and get too crazy! When you are selling a house, most buyers will not care what the materials are as long as they look nice. You can often buy similar looking materials at Home Depot or Lowes as you can at a fancy designer store, which costs five times as much. The best way to decide how many updates you must make is to look at other houses you are competing with. You have to look at more than a few. See what the kitchens look like, the bathrooms look like, the flooring, etc. Usually the fanciest house in a neighborhood will not sell for much more money than houses that are nicely updated, but the owners did not go crazy with the repairs. You don’t want to be the fanciest house, because there could be appraisal restrictions that won’t let your house sell for much more, even if there are buyers willing to pay more.
Extra items that people may not need usually do not add much value like a pool in Colorado. A pool in a cold climate may actually lower the value of a house because most people see it as a hassle. A hot tub does not add much value either, except for very specific buyers (unless you are in an area where it is expected that every house has a hot tub). If the hot tub is not in the best shape, it will be a huge hassle for the buyers to get rid of it. If you turn a garage into a bedroom, it may actually hurt the value of the home depending on the market you are in. This is why it is important to study trends in your area to see what adds value and what does not. Often a real estate agent can help homeowners figure out what the best options are.
What are the first repairs you should make?
Repairs that are needed to qualify for a loan will add much more value than cosmetic repairs because you eliminate most buyers if they can’t get a loan. If your house needs a roof, a furnace, has holes in the walls, or other major problems, fix those first. When taking on major repairs, homeowners sometimes run out of money or get tired of the house. You want to fix the major issues first so that if you have to sell before you originally planned, the new buyer can get a loan.
What are usually the best items to update in your house?
Kitchen and baths are always a good place to spend money, but you want to make sure you do not over improve for your neighborhood. You also do not need to spend $50,000 or $100,000 on a kitchen like they do on some of the remodel shows on TV (unless you have a million dollar home). I saw someone recently sell their house and they spent $80,000 remodeling their kitchen. The house was worth less than $400,000 and there was no way they would ever get close to that investment back. The house would have sold for just as much with a $15,000 kitchen remodel. Shop around stores for the best prices on counters, cabinets and appliances. There are huge swings in prices and most of the time, you will not need the most expensive materials. On the houses I flip, we can have a kitchen installed for less than $7,000 with new cabinets, counters and appliances.
Updating bathrooms can also add value to a home, but again you have to be careful with how much you spend. If you spend $20,000 on a bath in a $200,000 house you are never going to get that money back. We can remodel bathrooms for less than $3,000 when we completely gut them. Usually kitchens and bathrooms add the most value to a home if they need to be updated, but you have to be careful how much you spend. If a contractor tells you it will cost $50,000 to remodel your kitchen, get a second opinion!
What are some of the worst improvements you can make to a house?
Additions rarely pay off, unless you live in an area with incredibly high dollar per square foot, like San Francisco. If you add an addition, make sure you do it right and do not simply stick a room on the back of your house. Many times poorly done additions will not add any value at all, or may detract from the value. I see additions where a bedroom is added onto another bedroom. You have to walk through one bedroom to get to the other, which makes it a non-conforming room. You cannot count that room as a bedroom when you sell the house!
Painting a home, changing the flooring, adding new fixtures often add value as well. But you must make sure they are done to appeal to most people. If you paint your house all black, it is not going to add to the value. If you paint your house a bunch of crazy colors it also may turn off people. The more eccentric your improvements are, the smaller your buyer pool will be, and the less value they will add.
What items should you always update before selling?
The basics add the most value and make the home more enjoyable to live in. Paint, flooring, and fixtures can transform a home and add much more value than they cost. All of these items should be newer or new when you sell. Doing these updates can make the biggest difference in the feel of a house and be the most affordable. You don’t have to wait until you sell the home to make those improvements either! Many people wait to paint or replace the carpet until they get ready to sell. They think how nice it would have been to enjoy the updated house while they lived there.
Landscaping can make a huge difference in value, but going overboard will usually not provide the ROI. Most buyers are looking at the home and not the yard. If the yard looks good, the buyers can concentrate on the house. But if the yard looks absolutely amazing, it may not make the house worth any more. You definitely do not want an ugly yard, as that will deter many buyers from even looking at the home. Here are some key items that buyers look for in a yard:
- Patio or deck (does not have to be huge)
- Green grass (may vary based on location)
- Sprinkler system (may vary in location)
The items above add the most value. If you go crazy with trees, gardens, walkways, paved driveways, it may look nice, but it might not add any value. Some crazy yards can detract from the value because buyers think about how much work it will be to maintain the yard.
Figuring out what to repair or update on a house can be tough, but remember to get help from others. You also may want to make repairs that you know won’t add value, but will be important to you. Talk to a real estate agent about what repairs are necessary, and what repairs are not. Talk to contractors about cost and shop around for the best deals.