Remodeling - Does it Make Financial Sense, And Does it Need To?

Home Improvement Values

I am continually being sent proposals to publish articles or infographics about how you can make money by remodeling your home.

The reason you don't see many articles of this nature on Totally Home Improvement is because when I ask the authors to produce facts and figures to back up their claims, they are nearly always unable to do so.

Remodeling Increases Appraisal Value - But That's not Enough

Except in a few edge cases (such as an already over-capitalized property), most major improvements are going to increase the value of your home. But that's not the question I'm looking at here - I'm asking will the increase in value from remodeling be greater than the cost of undertaking the project?

So, with this in mind, please read on....

Hiring a Contractor to Remodel Doesn't Make Money

The most reliable data on this subject comes from the annual "Cost vs Value" report which is published by Hanley Wood.

To work out the cost of a remodeling project Hanley Wood takes into account labor, materials, subtrade expenses, and industry-standard overhead and profit, then they make adjustments based on location.

Then they estimate the resale value by providing descriptions and three-dimensional illustrations, plus construction costs and median home prices for each city, and send it out to some 200,000 appraisers, sales agents, and brokers.

The result produces an estimate of how much of the remodeling project's costs will be recovered by selling the property - the result is that almost no remodeling project carried out by professionals will make a profit for the home owner.

DIY Remodels CAN Make Money

When you remove labor costs and contractor profits, some projects do become profitable meaning that the resale value of your home goes up by more than the cost of the project.

Back in October of this year I pointed out that replacing entry and garage doors as a DIY project can be profitable.

There are many more remodeling and home improvement projects which can be profitable if you supply your own labor. You can work out what these are likely to be in your area by going through the Cost vs Value report and estimating what the projects will cost you to do on your own. Then compare your DIY cost to the improvement value, and you'll have some idea of how likely it is to return a profit for you.

A Different Approach to Estimating Remodeling Value

I was recently contacted by Tim Uittenbroek from Kayu Connection, a business which exports wood furniture around the world from Indonesia, about a detailed study he undertook called:

Best Home Improvements to Increase the Value of Your Home: 45 Experts Weigh In.

Just to be clear, this report does seem to suggest that you can profit by remodeling - something I generally dispute unless it's done as a DIY project, but Tim's data is far better than most of the reports and articles I've been asked to look at.

Tim's method involved asking 113 prospective home buyers how much extra they would pay for their favorite home improvements, and by asking 45 experts what they believe are the best projects to undertake.

My Issues With the Methodology

I don't believe this approach can provide realistic estimates for increases in home value by asking potential home buyers a hypothetical question like this - people will make 'honest' estimates based on an image in their own minds of what the improvements would mean to them, but the reality will be that because any actual improvements won't have been tailored to their specific desires, the amount they'll end up paying will be a lower value reflecting the compromise between what they wanted and what they actually ended up with.

The expert opinions seemed to be disconnected from reality in many cases. As Debbie Gartner, AKA The Flooring Girl pointed out, most of the experts were advocating Kitchen and Bathroom remodels despite the fact that study after study shows these projects will not make a profit for the home owner.

bathroom furniture

This doesn't mean you can't give your bathroom a makeover with the kind of modern-classic bathroom appointments from Utopia pictured above, it just means that if you're in it for the money then you'll have to do the improvement work yourself.

The Benefits This Study Offers Over Others

Despite the issues I have with this study, there are two great pieces of value it delivers...

  1. It indicates what home buyers want, even if their estimates on how much extra they would pay can't be relied upon, the study does at least provide an indication of the kinds of features they are currently looking for in a home. You can take this information into account when choosing which remodeling or improvement project is likely to make your home more desirable to buyers.

  2. Don't take advice from remodeling professionals when it comes to assessing which projects will give you the best return. It would appear that the experts are biased toward advocating projects which make the most money for themselves rather than profiting the home owner.

Update: Tim has written another article digging deeper into the topic which I recommend you read: The Cost vs Value Report and Why You Can Beat It.

Assess Your Own Remodeling Values

The second part of the question in the title is about whether or not you need to make money from a home improvement project in order for it to be of value to you.

Getting the most out of life isn't simply about the bottom line. Happiness, joy, purpose and fulfillment aren't easily accounted for with numbers.

You may desire, or in fact actually need a home differently configured to your current one, but selling and moving would be too disruptive to your life making remodeling the smart choice.

For example you may have a baby on the way, but you don't want to move home and take your older children out of their current school - adding on a bedroom can make much better sense than moving to a new neighborhood.

Perhaps your kitchen no longer serves your needs as your family changes and your lifestyle does as well, giving your kitchen a makeover can not only give you a sense of achievement once the project is complete, but also allow you to remain in the community you've grown to love over the years.

So my advice is ignore the home improvement experts and work out what you truly value - base your remodeling decisions on this.

Related Article