1. Smart Remodeling Choices - CBS News
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Adding a backyard deck or updating a bathroom can do more than increase your living space. It can
also increase your home's value.
The Early Show's personal financial adviser Ray Martin visits us on Thursday to tell us what
improvements generate the best return on an investment, how to deal with a contractor, and how
the government can help finance the venture.
While Americans may not want to risk putting their money in stocks right now, they are not
hesitating to put money in their homes. Commerce Department data shows that home improvement
spending rose 4.8 percent in 2001. And census figures show that homeowners invested $152.9
billion in improvements in 2000. That's up from $133.7 billion in 1999.
The fuel propelling this activity? A rapid rise in property values (in March, the median home price
was up 6.7 percent from last year), interest rates at 40-year lows, and free-flowing home equity
loans.
However, if you are treating your home as an investment, it's important to realize that remodeling
doesn't automatically increase a home's value. All too often, people pour too much money into a
project or make an improvement that doesn't resonate with buyers.
Projects That Make Sense
If you are thinking about remodeling, the National Association of Realtors says your best bet is a
minor kitchen remodel. On average, the project will cost $14,773. Homeowners receive 88 percent
of that money back when selling the home. Following are more improvements, the average cost, and
return on investment.
Minor Kitchen Remodel
Average Cost: $14,773
2. Return On Investment: 88 percent
Bathroom Remodel
Average Cost: $9,455
Return On Investment: 85 percent
Major Kitchen Remodel
Average Cost: $38,769
Return On Investment: 81 percent
Family Room Addition
Average Cost: $46,738
Return On Investment: 80 percent
Deck Addition
Average Cost: $5,865
Return On Investment: 77 percent
Master Suite
Average Cost: $63,275
Return On Investment: 75 percent
Attic Bedroom
Average Cost: $31,366
Return On Investment: 74 percent
Home Office
Average Cost: $10,526
Return On Investment: 55 best kitchen remodeling percent
Kitchens and bath top the list on investment return. Many real estate agents say not only will these
improvements boost the amount people are willing to pay for a house, they boost the number of
people interested in the home in the first place.
That 88 percent return on minor kitchen improvements sounds pretty good. But in 1998, the return
was 94 percent. Percentages across the board have slipped as the cost of the work has risen. This is
yet another reason to be smart about your remodeling choices.
3. Minor Kitchen Remodel
In 1998: 94 percent
In 2001: 88 percent
Bathroom Remodel
in 1998: 89 percent
In 2001: 85 percent
Major Kitchen Remodel
In 1998: 87 percent
In 2001: 81 percent
Family Room Addition
In 1998: 84 percent
In 2001: 80 percent
Deck Addition
In 1998: 70 percent
In 2001: 77 percent
Master Suite
In 1998: 82 percent
In 2001: 75 percent
Attic Bedroom
In 1998: 82 percent
In 2001: 74 percent
Home Office
In 1998: 64 percent
In 2001: 55 percent
There is one exception to the slipping percentages. Deck additions have actually improved seven
points from 1998. There doesn't seem to be a clear explanation for this.
4. Location, Location, Location
The above numbers are national averages. However, there is no question that you will get a much
higher return on your investment if you live in a competitive housing market. The following example
is adapted from Realtor Magazine and Remodeling Magazine:
PROJECT: BATH
Return in Washington, D.C.: 125 percent
Return in San Francisco: 152 percent
Return in Boston: 71 percent
Return in Albany, N.Y.: 64 percent
You can safely put more money into remodeling the bathroom in San Francisco than the bathroom in
Albany because you are much more likely to get that money back.
When deciding what area to remodel or how much to spend, also check out other homes in your
neighborhood. If most of the homes have three bedrooms and you only have two, a bedroom addition
makes sense. You don't want a buyer to choose the house next door just because it has new kitchen
appliances.
How Much To Spend
So how much should you plan to spend on remodeling? Again, consider your city's housing market
and other homes in your neighborhood. Ask a real estate agent how much more she could get for
your house once the project is complete. Find out what the average cost is for your improvement and
get bids from at least three contractors.
But what if you don't plan to sell your home? Or you simply need a bigger family room or another
bedroom? Do homeowners actually sacrifice their quality of life in order to safeguard one of their
biggest investments - their home? No. But maybe they should. Let's say you spend $50,000 on a
family room addition. Hopefully, you'll enjoy the space AND get that money back when you sell the
home. But what if you don't? If the larger room only brings $15,000 extra to your sale price, was
your enjoyment worth that $35,000? You could have used the money to buy a new car or help a child
through college.
Choosing A Contractor
There are tons of horror stories out there about shoddy contractors, unreliable workers and projects
running months behind. Every horror story also comes with its own expensive, over-budget, price
tag. That's why it's essential to do your homework.
When writing a contract, most people know to include items such as the contractor's license
number, description of the work and a start date. Here is a list of items that are sometimes
overlooked:
A List of Materials: Mahogany decking vs. pressure-treated wood, paint color and brand
5. Description of Heavy Equipment Use: What will be used and how will operators access your
property? (Bring it around the side yard, not through the flower beds.)
Process for Changes: How and when will changes be requested and made once work has started?
Warranties for Work, Materials: Attach the warranty that conforms to your state laws which provides
for repair and replacement of defective materials.
Clause for Dispute Resolutions: How will any disputes be handled?
Payment Schedule: Specify total payments and partial disbursements for materials, phases of
completion and final payment. Always pay in stages. Once you hand over the money, you hand over
control.
Paying For It
The most common option is a home equity line of credit. The approval process includes an appraisal
of the home value and can be approved and closed in a few weeks. There are no closing costs.
However, the government offers two loans that most people don't know about. Typically, they apply
to lower-priced homes - either starter homes or homes in distressed areas.
Homeowners who have little or no cash or equity in their homes have a Catch 22 of sorts. They
cannot borrow against their homes current value because they don't have enough equity but they
would have enough equity if only they could improve their home. The U.S. Department of Housing
and Urban Development backs two loan programs for homeowners in this situation.
Title I Loans: FHA Title I loans are offered by qualified lenders who provide loans for renovations
when other banks will not lend because there is not enough equity in the home. These loans can be
up to $25,000 with repayment terms up to 15 years. Often there is no equity or appraisal required on
loan amounts less than $15,000. The interest rate will be several percentage points higher than
conforming mortgage or home equity loan rates, but people who use a Title I loan wouldn't qualify
for traditional financing.
203(k) Rehab Loans: 203(k) loans offer long-term fixed rate loans based on the expected market
value of the home AFTER renovation. This special loan allows buyers purchase a fixer-upper
property "as is" and provides the cash up front to perform the necessary work. 203(k) loans also
feature low down payments of three to five percent. Check out www.hud.gov to find out more.
Finally ...
Once you've done all of this work, you need to protect your investment! Review your homeowners
insurance; it needs to reflect the increased value of your home. Remember to cover the value of
additional contents and landscaping, too.
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