June 26, 2018 / 12:00 PM / 5 months ago

YOUR MONEY-Mental math needed to evaluate home renovation value

    By Beth Pinsker
    NEW YORK, June 26 (Reuters) - You hear it all the time: if
you put money into home renovations, you will make it back when
you sell. 
    Yet given the current dynamics of the U.S. housing market,
separating out from the asking price the exact amount you spent
years ago on subway tile or granite counters can be daunting. 
    "Practically speaking, it is very difficult to have that
data set," said Nino Sitchinava, principal economist at
Houzz.com. "There is a way to isolate the value of, say, a
bathroom, if you did rigorous statistical analysis and control
for different house features."
    More likely than not, what drives your listing price is
whether you live in a hot market and the inventory of the
neighborhood. So what is really going on when figuring out if
your renovation was money well-spent requires some mental
mathematics. Homeowners are often trying to justify the amount
they want to spend on renovation projects, projecting the price
appreciation they will reap down the road. But this is not real
money that can be quantified, and sometimes people lose.  
    Tracie Hovey, a public relations officer from Waynesboro,
Pennsylvania, spent a bundle fixing up a house with her husband
a few years back, adding up what they thought they would get out
of it. They ended up selling the home at a loss of more than
$100,000.
    When the couple moved recently to another house, this time
an outright fixer-upper, they did reverse mental math to figure
out how to discount the price for all the work that was needed
on it, particularly on the kitchen, Hovey said.
    
    FACTORING IN
    Half of the nearly 150,000 U.S. homeowners that Houzz
surveyed in spring 2018 said they were going to be working on
home renovations this year, with a median spend of $10,000.
Almost all of the money for this work is coming out of cash,
with just 11 percent saying they will get a secured home loan. 
    Most popular: Kitchens, followed by bathrooms, with guest
bathrooms slightly outranking master baths. 
    If you are flipping houses, the return on investment for
these upgrades is easier to assess. But homeowners are staying
put longer, according to a new survey from HomeAdvisor.com,
which found 84 percent of homeowners have no plans to move. 
    For longer-term residents, Houzz's Sitchinava said what they
are really measuring is homeowners' "perceived" value of various
remodels. 
    That means, if you live in a neighborhood where home values
are on the rise, you might feel comfortable to go ahead and
indulge yourself in a renovation, because you know you will
eventually get paid back. 
    This is certainly how Alexander Lowry looks at the money he
is currently spending to fix up a new house he bought with his
wife near Boston. 
    "We would have been willing to pay higher for a house that
needed nothing," said Lowry, 41, a professor of finance at
Gordon College in Wenham, Massachusetts. "But my wife is a
personal organizer, so this is fun for her to put her own stamp
on the house." 
    While he plans to never move again, Lowry is pretty
confident he would make money if he sells, and that is enough to
make the costs work for now. 
    "What you want to do is get the next owner to fund your
lifestyle now," said Brad Hunter, chief economist for
HomeAdvisor. "It's hypothetical as to how much they are going to
get back. But people are making improvements to their home with
the notion in mind that they will get some of it back."
    Figuring out the true value of your renovation means looking
at how much $10,000 would be worth if you kept it invested,
rather than spending it. After 10 years, at 6 percent growth,
you could have $18,000. Given that you would have had to pay
capital gains tax all along, you might end up with around $6,800
in your pocket. (Note that you may also have to pay taxes on
your home value appreciation eventually, too.)
    So if you are wrestling with the question of return on
investment, ask yourself: Are you getting that much enjoyment
out of your upgrade? 

 (Reporting by Beth Pinsker
Editing by Lauren Young and Matthew Lewis)
  
 
 
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