DROdio Real Estate

The cost effectiveness of home remodeling in order to sell a home is a topic that can strike fear into the hearts of even the most hearty home owner! Home Sellers know that buyers expect certain key elements in the home that they are looking to purchase and Sellers know that, in general, the cost to remodel vs. what a buyer will pay for that remodeling project does not always work in their favor. The thing that causes Sellers the most concern is the worry that a remodeling project will not translate into a higher net return for them. Fortunately for all of us, "Remodeling online" in conjunction with the "National Association of Realtors" has recently released a "cost vs. value" report to give Sellers and Real Estate Professionals the lowdown on some of the improvements a Seller can make that really do pay off in the end.

For added accuracy the team at "Remodeling Online" broke the "Cost vs. Value" report down into 9 geographic locations. For our purposes we will be focusing on the "South Atlantic" area and specifically the Washington, D.C. region. Keep in mind, that although this report will give you a baseline in terms of what costs and returns generally are in any given market, local market conditions will always have an impact on both the cost and value of any remodeling project.

Where did they get these numbers?

The "Cost vs. Value" report got their cost data from "HomeTech Information Systems", a remodeling estimating software company located in Bethesda, MD. "Hometech" surveys contractors around the United States to get up-to-date information and then uses an "adjustment factor" to take into account regional pricing trends. On the value side of things, these figures were compiled by the "National Association or Realtors" who sent surveys out to over 100,000 appraisers, sales agents and brokers. The final figures in this report are based on the results of these surveys which were completed by more than 2,700 respondents. The questions on the survey posed queries concerning project descriptions, constructions costs and median home price data for each geographic location.

Recouping the cost of home improvement:

In the Washington, D.C. area, the recoup cost on almost all improvements listed compared favorably with the national averages in every case but one. The home remodeling projects which garnered the highest return per investment in them were "Deck Addition" which boasted an 85.6% cost recapture rate, "siding replacement" at 85.1% "window replacement-wood" at 80.3% and rounding out the top 4 "widow replacement-vinyl" at 80.2%. Remodeling projects that potential home sellers should probably steer clear of are: "Home office remodel" with an estimated re-sale return of just 59.8%, "sun room addition" at 64.2% and "bathroom addition" at 68.2%

Defining remodeling projects:

Now that you have an idea of some remodeling projects which will give a good return on your investment, let's look at how the "Cost vs. Value" report defines these improvements. For the wood deck addition the report states "add a sixteen by twenty foot deck using pressure-treated joists supported by four by four posts anchored to concrete piers. Install pressure-treated boards in a simple linear pattern. Include a built-in bench and planter of the same decking material. Include stairs, assuming three steps to grade. Provide a complete railing system using pressure-treated posts, railings, and balusters." The report estimates the cost of a deck of this size with these features in this region to cost an estimated $9,266.00 and then, in turn, for the resale value to translate into an additional $7,936.00 in added home sale value.

"Siding replacement and window replacement" which make up the remainder of the most cost effective improvements are pretty self explanatory. Cost estimates for these are $8,990.00 for siding replacement (1,250 square feet of existing siding with new vinyl siding, including all trim) with an estimated return of $7,651.00 and wood window replacement cost of $10,242 ( 10 existing windows three by five foot double hung with insulated wood replacement windows, does not include interior trim replacement) and vinyl replacement windows at a cost of $9,391.00 (10 existing windows three by five foot double hung windows with insulated vinyl replacement windows) with a value added amount of $7,530.00.

Curb appeal, energy efficiency and relationship to value:

Outside of the deck, the other top value added improvements like siding and window replacement, have 2 important things in common added "curb appeal" and increased "energy efficiency". Why are these two things important to home buyers? In a day and age when most home buyers begin their home search online, pulling up a picture that depicts a home with dilapidated siding and dated windows is a "turn off" to most buyers. That buyer may immediately assume two things, that this home has not been properly maintained and that this is a project that they will have to take on should they purchase this home.

Consider also that in our current climate with oil prices soaring to all time highs, more and more buyers are turning to an "energy efficient" mindset where they are seeking out products and services that support these ideas. Windows, doors and siding are all great examples of improvements which can decrease overall energy consumption and cut down on heating/cooling costs. Another improvement not covered in this report which might also be considered energy efficient is a wood burning or wood pellet stove. Several retailers have now actually come out with product lines that are considered "energy star" rated that are proven to use less energy and would also be a draw for a potential home buyer.

I hope that you have found this report to be helpful in shedding some light on some of your remodeling angst. I know that I sound like a broken record here, but since all of this information is subjective based on your individual situation and property location, it is always best to consult a real estate professional to get an accurate pulse of what improvements might work the best in your particular situation. The report did not rank adding a bathroom to your home as a very cost effective improvement; however, if all of the homes in your neighborhood have 2 full baths and your home only has one full bath, this type of improvement may make sense in your particular situation.

If you are someone who is "handy around the house" and you are confident in your ability to complete some of these improvements on your own (without sacrificing quality) then you might also consider that as an option too. If you do opt to take the "do it yourself" route remember to pull all of the required building permits, etc. through your local county jurisdictions when required and keep in mind that any work you complete will be subject to a final inspection by the County/City where you reside.

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So you’ve read about short sales, and you’re pretty sure it’s the best way to avoid foreclosure on your home. Still, before you decide to go forward with a short sale, here are a few things to keep in mind:

• You’re not necessarily eligible. Even if you’ve discovered that you now owe more on your mortgage than your house is worth and due to other factors, you won’t be able to keep up with the payments in the near future, your bank may not approve you for a short sale. In fact, as long as you’re current on your payments, many banks are unlikely to accept one. Why would they? Banks accept short sales because the loss they cause is usually smaller than the cost of foreclosure. If you’re current on your payments, the bank may not see you as a foreclosure risk quite yet. To be clear, we are not advocating that you default on your mortgage – if you do so, your credit rating will suffer. But before the bank will accept a short sale, you need to convince them you will be unable to pay back your loan. Still, if you’re interested in a short sale, call your bank right away – you might be able to convince them to agree to a short sale, even if you are current on your loan.
• Short sales hurt your credit rating. When you sell your home short, the bank that holds your mortgage is accepting less money than you owe them and writing off the difference. According to Maxine Sweet, credit bureau Experian’s vice president of public education, banks will report this arrangement as “settled” rather than “paid.” This has a sharply negative effect on your credit rating. Nevertheless, it ends the cycle of default and late payments – if you remain in default until your bank forecloses on you, you can’t begin rebuilding your credit until you’ve emerged from the process. With a short sale, your credit may be harmed, but you can begin repairing it immediately. You can read Sweet’s complete article on short sales at http://www.experian.com/ask_max/max051408a.html
• Short sales can take a long time. If your situation has come to a short sale, you likely want to get it over with in a hurry. But since your bank is writing off part of the loan’s value, they get a say over which offers you can and cannot accept. If they think your prospective buyer is making a lowball offer, the bank has the right to reject it and force you to wait for a higher offer. Even if they ultimately decide to accept an offer, it may take as many as several weeks before they respond to an offer you have passed along to them. All that time, you remain in default and can’t move on.
• You may not be done. Even after you complete a short sale, your home-owning headaches may not disappear. Your bank may take you to court seeking a deficiency judgment for the remainder of the loan. For example, if your mortgage was for $300,000 and you sold the house for $250,000, the bank could try to recoup the remaining $50,000 plus expenses. This, however, is unlikely to happen to you. Banks usually recognize that paying lawyers to pursue legal action against people who have little money is ineffective and thus generally won’t seek a deficiency judgment. Nevertheless, you should involve counsel if necessary, and you should make sure your bank won’t pursue one.

One thing you no longer need to worry about is paying taxes on the amount forgiven. In the past, the amount of your loan forgiven was considered income and taxed. Thanks to the Mortgage Forgiveness Debt Relief Act of 2007, debt forgiven in a short sale of your home is tax-free in 2008 and 2009.

The above isn’t meant to dissuade you from a short sale. They can be a valuable tool to escape foreclosure and begin rebuilding your credit. They do have several drawbacks, however, and we encourage you to discuss the idea with your realtor and lawyer.

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