Home Renovations and Home Value: What's Your Return on Investment? Will You Make Your Money Back?

Home renovations are exciting ventures that can improve your living space, enhance functionality, and even increase your property's value. However, the question that often arises is whether you'll make your money back when it's time to sell. The answer to that is, well...complicated! Here, we'll explore how to make informed decisions when renovating your home to maximize its potential return on investment (ROI).

1. Know Your Market:

• Research: Begin by researching your local real estate market. Understand the price range of homes in your neighborhood and the features that appeal to buyers. Don't over-improve your home when compared to the homes around you. Those comparable homes will be the benchmark for your sales price down the road.

• Identify Trends: Identify current trends and buyer preferences in your area. What are buyers looking for in terms of kitchen upgrades, bathroom renovations, or outdoor spaces? However, don't over-value this in a seller's market. Read my article on what an appraiser looks for when valuing your home. Clue: It's not trendy designs and materials!

2. Set a Budget:

• Establish Priorities: Determine your renovation priorities and set a budget accordingly. Focus on projects that align with your long-term goals and are likely to provide a good ROI.

• Include a Contingency: It's wise to include a contingency fund in your budget to account for unexpected expenses that may arise during the renovation process.

3. Consult with a REALTOR®:

• REALTOR's® Perspective: Enlist the help of a local real estate agent who can provide insights into which renovations are most likely to increase your home's value in your specific market.

• Pricing: Ask for guidance on how various renovations might impact your home's listing price. Check out the links below in section 4 for the ROI of the most common renovations.

• Is It a Buyer's Market or a Seller's Market?: This is a critical element in deciding whether or not to update your home to increase its value. Forget about all of the interior design and construction shows on your TV. If it's a seller's market, the last thing you want to do is spend a ton of money on renovations. If it's a buyer's market, a few renovations might make sense. If you're planning on staying in the home for a while, then do what makes you happy, as long as you don't increase the value of the home significantly more than the comparable homes around it. If you do, you'll never make that money back.

4. Prioritize Exterior Renovations and Kitchen and Bath Updates:

• Exterior Projects: According to Zonda's 36th Annual Cost vs. Value Report the most valuable renovations you can do are those to the outside of your home. Some of the exterior renovations will bring you a 100% or better return on your investment.

• Kitchen: Kitchens are often considered the heart of the home. Upgrading countertops, cabinets, and appliances can have a substantial impact on your home's appeal and value. Exterior renovations are followed by a mid-range kitchen update, which, according to Zonda, will bring you only 85.7% of your money back. Surprisingly to many, a major kitchen overhaul will only net you an ROI of 31.7%.

• Bathrooms: Modernizing bathrooms, especially the master bath, can significantly enhance your home's desirability. However, a mid-range bathroom remodel will only bring you an ROI of 66.7% according to Zonda's 2023 data.

• Functional Obsolescence (Whaaat??): Functional Obsolescence is a term that is used when parts of a home are no longer functional for the purpose they were supposed to serve. A kitchen or bathroom or any other room in the home can become functionally obsolete. In these cases, a renovation is needed or the home will need to be sold "as is" or at a reduced price. For more information on functional obsolescence, read the article here.

5. Focus on Energy Efficiency:

• Energy Savings: Invest in energy-efficient upgrades like insulated windows, HVAC systems, and added insulation. These not only reduce utility bills but also attract environmentally-conscious buyers.

6. Enhance Curb Appeal:

• First Impressions: The exterior of your home is the first thing potential buyers see. Landscaping, a fresh coat of paint, or a new front door can go a long way in improving curb appeal.

7. Evaluate DIY vs. Professional Work:

• Skills and Resources: Assess your DIY skills and the complexity of the renovation projects. Some tasks may be best left to professionals to ensure quality and safety. There are many best practices that will significantly affect the outcome of your renovation. For instance, tolerances on tile height differentials. Be sure you know what you're doing before you dive in.

• Permits and Codes: Make sure you obtain any necessary permits and adhere to local building codes to avoid complications during a sale. Changes to your property that required permits, but were not properly permitted will cause you considerable headaches and regrets down the road. Make sure you know what has to be permitted before you begin.

8. Keep an Eye on Trends but Stay Timeless:

• Design Choices: While incorporating current design trends can be appealing, opt for timeless elements that won't quickly become outdated. Neutral color palettes and classic fixtures are safe choices.

9. Document the Renovation Process:

• Records: Keep thorough records of all renovation expenses, including receipts and invoices. This documentation will be crucial when it's time to calculate your ROI. Your REALTOR® should use these documents when they meet with the appraiser.

10. Market Strategically:

• Timing: Consider the timing of your renovation and sale. Consult with your real estate agent to determine the best time to list your renovated home for maximum exposure and ROI potential.

Ultimately, making money back on home renovations depends on several factors, including the local market, the scope of the renovation, and the quality of the work. By conducting thorough research, setting a budget, prioritizing key areas, and seeking professional guidance, you can make strategic renovation decisions that are more likely to pay off when you decide to sell your home.