I love that show.
‘Love It or List It’ is a show on HGTV where people who are dissatisfied with their current home invest in a renovation at the same time they begin looking at other homes. At the end of the show, they decide if their renovated home is worth keeping or do they sell it and buy another one. It is fun to watch and listen to the concerns of the owners…some of which are quite realistic and others, well, maybe not as much.
Right before the owners make the decision to either list or stay, they get an opportunity to see the renovation (which is usually a dramatic improvement) and its effect on market value. The cost of the renovation usually comes in somewhere between $30k and 75k and involves maximizing/capturing some space (typically attic or basement), opening up some rooms and a kitchen/bath re-do and the obligatory paint job to bring the colors up to date. Usually, the improvements made to the homes increase the value of the home by an amount greater than the cost and everyone is happy.
The show is engaging and fun but I think would be a lot more effective and educational if they spent some more time on the math behind the decision(s).
When the market stopped in 2008, people became trapped in their homes. The ability to secure a mortgage became as challenging travelling to Mars and thus, improving one’s current home became a more realistic option. While a renovation or addition is usually driven by need, the investment needs to make sense. Simply adding to an existing home or putting in a new kitchen is pointless unless there is a financial benefit in doing so.
How do you determine whether or not renovating or adding (or both) is the right idea? Ask yourself the following:
- What is the ‘price per foot’ range in my neighborhood?
- How does my home compare?
- What is the average size of the homes in my neighborhood?
- What is the ratio of land/improvement within your neighborhood?
Simply put, the decision to move, renovate or add begins and ends with those questions.
If the ‘per square foot’ value of your home is at or below the average within your neighborhood, then there is financial room to improve. How much money can be spent will be determined by how far you are from the line. The easiest way to think about it is to find the per foot difference between your home and the renovated homes and multiply it by the size of your home.
If you live in a 3500 SF home worth $180/SF and homes in your neighborhood contains renovated homes with $210/SF values, then the math looks like this:
$ 210/SF for a renovated home
– $ 180/SF for your home
$ 30/SF difference
x 3500 SF
$ 105,000 renovation budget
If the average home in your neighborhood is worth $180/SF with comparable sales for renovated homes trading closer to $210/SF and you live in a 3500 SF home, then you have $30/SF x 3500 SF or $105k. If you feel that the improvements required are less than $100k, then renovate. If not, be careful.
Likewise, if you live in a neighborhood where property values are trading at $160/SF with additions costing in $125/SF, then you are probably in good position to add some space. Be mindful of creating adding too much as you need to keep your eye on the size of the home. Adding 2000 SF to a 2500SF home in a neighborhood where the average size is closer to 3000 SF may not be wise. Additions usually work best where the value of the land is a larger percentage of the homes value and in older neighborhoods where floor plans are less open.
Regardless of whether or not you decide to renovate, add or sell, there is math to be done. A good first step is investing time in truly understanding the market values in your neighborhood. Appraisers, Realtors and public records are all sources you can use to help you gain insight into market value of your home and those around you. Do your homework, do the math and make your decision.
