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July 31, 2006
Renovating In A Cooling Market
A: If you bought a wreck for a discounted price or just found an apartment in good, but not great condition, then you'll probably want to renovate. But what if you are looking to flip the property or sell it within the next 2 years or so? What renovations are worth it and what aren't in a cooling housing market? Let's try to answer this!
Past history tells us that money spent on kitchens, bathrooms, and floors get you the most money back at resale! But thats in a booming housing market, not a cooling one. To find out what renovations pay off in a slowing market, lets try to go into the minds of a buyer who is dealing with less affordability due to higher lending costs (like today).
Bobby Buyer makes $150K a year, has $100K in cash in banks, and wants to buy a $400K condo with 10% down. OK. Right off the bat he will need about $55K to close on the deal ($40K for down payment + $15K or so for closing costs). That leaves him with $45K AFTER closing to do what he wants with the property. Chances are he is NOT finding a fully renovated condo for this price so lets assume the apartment needs work! Should he:
A: Renovate the kitchen
B: Renovate the bathroom
C: Renovate the floors
D: Renovate ALL OF THE ABOVE
Tough question. Now lets assume that Bobby Buyer intends to sell the apartment in 2 years, once he satisfies the tax code for primary resident tax exemption of up to $250K. The housing market certainly doesn't seem like it will boom in the next 2 years given the fed's actions and rising interest rates. So, if the market will stay flat to down, what renovations make sense to you?
Here are my thoughts, one by one.
A. Renovate the kitchen - DEFINATELY NOT! It will cost about $10-$15K or even more to redo your entire kitchen, plus 1-2 months of contracting work that you have to deal with. In addition, kitchens are a very personal room that most buyers like to fit into their own taste. If your renovations conflict with the potential buyers taste, you may NOT get any premium when you go to resell.
Now, given current market conditions and our quick prediction on what the market might be like in 2 years, how are we to expect top dollar for this type of renovation where we cant guarantee the buyer will even like it? We can't! Pass on this given the situation at hand as to me it looks like a high risk (due to high cost), low reward (premium not guaranteed) scenario.
B: Renovate the bathroom - POSSIBLY! You can get away with cosmetic work to the bathroom for relatively cheap. Options include reglazing the tub, re-tiling the floor, a new medicine cabinet, and a paint job. You don't have to spend $10K on a bathroom if you don't want to and being stingy on this work might make for a good investment at resale. Buyers HATE disgusting bathrooms and showing a nicely refinished bathroom could mean the difference between a bid of $425K and $440K. Dollars & Sense; if you can spend $5K and make a bathroom much nicer than it is now, then DO IT!
C: Renovate the floors - DEFINATELY! Im huge on hardwood floor resurfacing because of the risk/reward ratio that this renovation offers. I know, you hear risk/reward and you think of gambling or stock trading. Well, thats how I view things. If you can spend $1000, or $2 a square foot for a 500 sft surface area of hardwood flooring (whose apt size probably totals 650 sft), and get a newly finished floor that just shines back at you, THEN DO IT! Trust me, it is night and day for such a little amount of money. When you go to resell, buyers will have a great first impression when they open the door to a bright floor that shines in their face! A good first impression for the buyer is critical when selling a home and equates to a higher bid at resale.
D: Renovate ALL OF THE ABOVE - NO! If it was up to me, I would spend $6,000 total on refinishing the floors and re-doing the bathroom as much as possible with the remaining funds. Adding in the kitchen renovation will boost your expenses to almost $20,000 and force you to get $475K or so at resale to break even (taking into account seller fees). It just doesn't add up.
The SKINNY: IN A SLOWING HOUSING MARKET YOU WANT TO DO THE LOW RISK HIGH REWARD RENOVATIONS THAT COULD PAYOFF AT RESALE. THESE INCLUDE FLOORS & BATHROOMS, NOT KITCHENS!
Of course, its entirely up to you and the money you want to spend on your new home. To each his own. Just before shelling out $20-$25K on renovations, ask yourself if you will want to sell in under 2 years. If you do, I strongly suggest cutting this expense down to $7K or under and that to me means floors and bathrooms! After all, spending more money than you want to will only worsen your financial situation and might force you to sell down the road sooner than you would otherwise want to. Not a good recipe should the housing market remain slow and you need to find a buyer fast!
Posted by urbandigs at July 31, 2006 8:05 AM
That's great advice, thanks a lot! As for renovating the bathroom, I found some helpful information on this website: New York Contractors
Posted by: Bernadette at August 23, 2006 9:33 PM
It's interesting how you break it down. I like your emphasis on bathroom reno's over kitchen's. Do you think newer appliances (assuming the existing are around 20 years old, but in decent shape,) would payoff at resale?
Posted by: Fin at October 6, 2006 2:29 PM
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