Value added: in markets across the country, remodeling projects are a solid investment - Feature

Building Products, Jan-Feb, 2004 by Sal Alfano

Homeowners contemplating a major remodeling project mostly are interested in what the work will cost, when it will get started, and how long it will take to complete. Also on their minds is how much value their investment will add to their home.

The importance of resale value varies depending on the overall state of the housing industry and local market conditions in particular. Homeowners usually are more concerned about property values in a buyer's market, when existing homes are slow to sell. When housing sales are strong, resale value plays less of a role in remodeling decisions, because homeowners are more confident of recovering their money. But folks also are concerned that their remodeling plans won't make their house the highest priced in the neighborhood.

The annual Cost vs. Value Report, conducted by REMODELING magazine (a sister publication of BUILDING PRODUCTS), attempts to quantify these concerns by comparing cost-to-construct with added resale value for a selection of the most common remodeling projects. The 2003 report targets the 35 cities listed as top remodeling markets by the Harvard University Joint Center for Housing Studies.

The goal of the report is to provide remodelers and builders that do remodeling with a range of data between two sets of cost and value figures that can be used to help set customer expectations. The upscale project descriptions detail how the two versions differ as to square footage, use of high-end finishes, and other factors that affect costs. The higher upscale costs serve to remind customers how decisions about size and scope affect a project's cost.

DATA COLLECTION

Cost data for the Cost vs. Value Report come from HomeTech Information Systems, a remodeling estimating software company based in Bethesda, Md. HomeTech collects current cost information quarterly from thousands of contractors nationwide. The figures include markup and are adjusted to account for pricing variations in different parts of the country.

Resale values are based on the professional judgment of members of the National Association of Realtors (NAR). Surveys containing customized cost-to-construct data for each city, as well as information on median house prices, were sent via e-mail to appraisers, sales agents, and brokers; they responded with dollar figures for each remodeling project that represent the value the completed project would add to the selling price of the house under current market conditions. In addition to broadcasting the surveys to its membership, the association collected the value data and tabulated the results.

A GRAIN OF SALT

While the numbers presented here can serve as guidelines when contemplating the potential return on investment for a particular remodeling project, it's important to acknowledge a variety of factors that can affect both the cost of remodeling and a home's resale value.

On the one hand, costs for materials, subcontractors, and labor vary considerably, not only in different parts of the country but among remodeling companies operating in the same market. Overhead also varies, as does a company's target customer. A small firm targeting middle-class, blue-collar families will find its customers' price expectations differ considerably from those of a high-end design/build firm with a white-collar clientele. In addition, some project costs and values appear too high or too low simply due to the leveling effect of averaging.

There is even more variation on the value side. Return on investment depends on the value of the house itself, the value of similar homes in the immediate area, and the rate at which property values are changing in surrounding neighborhoods. The same house in a different neighborhood within the same city will vary considerably in value, as will a house in a suburban location when compared with its rural or urban counterpart.

Availability of alternatives also has a bearing on a home's value. In Phoenix, for example, people contemplating a remodeling project may find everything they want in a new home, of which there is a steady and easily accessible supply.

Remember also that there is a difference between a house's value and its selling price. In a hot market, buyers may pay more than market value to gain entry into a particular neighborhood. Factors like commuting distance, quality of schools, and proximity to shopping and cultural activities all play a role in determining resale values.

Nevertheless, the Cost vs. Value Report provides a guideline you can use to help your customers make decisions about the size and the scope of the projects described here. If resale value is a major factor in that decision, the best course of action is to seek an assessment from a real estate agent active in the particular neighborhood.

UTILITY VALUE

Finally, the value of any remodeling project includes elements that can't readily be measured in dollars and cents. Unlike other kinds of investments--stocks, bonds, or bank CDs, for example--people retain the use of their money in the form of the remodeled space. This "utility value" is difficult to quantify, but it is always present.