I’m in the middle of a bathroom remodel, so things have been hectic in my world. But beyond the noise and dirty house, how much value is this going to add? If I spend $15,000, my home will be worth $15,000 more, right? Let’s talk about it.
Dollar for dollar: It’s rare in real estate to spend a dollar and get a dollar back in value. It seems like it should be easy to increase value like it is on HGTV, but even if you look at the Remodeling 2018 Cost vs. Value Report, hardly any items on the list give close to a 100% return compared to the cost. For instance, a bathroom remodel is said to only add 68.2% of the cost to the value, and an upscale kitchen remodel is said to only recoup 46.5% of the cost in the resale market. Yikes. That’s pretty far from 100%.
Tub example: Here’s an example about cost vs value. Tubs like this can easily run $3,000 to $5,000 for just the tub alone, and based on conversations I’ve had with owners it’s not uncommon for someone to have spent $6,000 to $15,000 for a set-up like this. The tub is wonderful for someone who needs it, but in terms of value it might add very little if anything (classic functional obsolescence). In fact, many buyers might count it as a negative because it’s something they’ll likely tear out. Thanks Gail Robards for the photo.
Big point: I’m actually not a huge fan of published cost vs value lists because I wonder where the data comes from. Also, do the numbers make sense in every neighborhood and price range? Probably not. Yet I find these lists are still useful in conversations. An owner might say, “I spent $22,000 on a bathroom remodel, so my home is worth $22,000 more now.” Well, firstly let’s realize the remodeling lists don’t even give you $22,000 in value, so it’s probably a good idea to lower expectations (before the appraiser gets out there especially). Most of all, let’s look to the comps with similar features. Are they selling for $22,000 more? That’s what matters most because real estate value is about what buyers are willing to pay for something – not the cost. Thus an owner might have spent $70,000 on a remodel, but what are buyers paying for similar remodeled homes in the neighborhood? That’s the most relevant question, and one which appraisers will focus on when coming up with a value.
My bathroom remodel: Here are some progress shots for my bathroom remodel. We went with a tile floor that looks like wood, subway tile in the shower (classic look in my mind), and a white quartz counter. This bathroom only had a stand-up 1950s shower, so part of the remodel involves moving the shower to the existing tub. This left a huge space, so I’m building out shelves in the old shower. Eventually these shelves will be stained a darker brown to match everything. And this is Ollie, our rescue dog.
I hope that was interesting or helpful.
Questions: What types of conversations do you tend to have about cost vs value? Have you ever used actual cost vs value figures like this to help conversation flow? I’d love to hear your take or any stories.
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Great post Ryan. I like to point out in the cost versus value conversation is that often when someone remodels, they are spending a loads of money in labor and materials to remove and then replace something that still has some value remaining. It may have cost $5,000 for the new tub that might only contribute a portion of that because of being nicer than what is expected in the market. On top of that, the owners also spent $500 to remove a tub that cost $1,000 when it was new and still has $500 in remaining value. If upgrading for value, make sure the market expects the upgrade (rather than prefers), that way what you’re removing has lost most or all of its value. When in doubt, stick to carpet, paint, and bark dust :-). If upgrading for self, not investment, just do what makes you feel good.
Thank you Gary. You are spot on with your comment. Labor is more expensive these days too in my market at least because there is a shortage of skilled labor. Thus contractors have the advantage in charging higher rates in many cases.
I like your sage advice at the end. I think we’re on the same page about no carpet in the bathroom of course too. I like your last line because people ought to enjoy their homes. We sometimes treat real estate like it’s this mathematical equation where ever dollar has to make sense and give an immediate yield of at least one dollar. That’s a myth anyway, so we might as well focus dollars on enjoyment. Yes, keep resale value and the market in mind, but enjoy the home. A pool will probably be worth far less than the cost to build, but a family will still gain so much from the pool. That reminds me it’s not always about the cost or the value something adds…
Land appreciates.
Structures depreciate beginning the moment of completion.
Appliances & fixtures .. worth 50% at end of warranty & that might be generous given repair costs.
PACE financed upgrades worth 33-50% at install due to leverage & tax subsidy enabled overpricing, unless they provide positive cash flow 15-30 years IMHO.
Still, people want to live in dream homes & if they have the resources will spend what they want, justifying after the decisions are made. The game gets bigger and more out of scale in the upper end.
Pools aren’t installed based on market value BUT if you figure how many trips to Disneyworld you save, they’re a bargain.
A media room might have a payoff considering the cost of taking the fam to the movies + popcorn & have you seen the price of 3D tickets?
That soaking tub…. if Momma is happy…. cheaper than a divorce.
This really wasn’t a real estate question, was it?
So good Jeff. Thank you. I love your perspective. Trips to Disneyland are no joke. I’m personally not even a fan. Maybe it’s because I grew up in Southern California, but also the thought of paying big bucks to basically stand in line just doesn’t cut the mustard for me.
“If Momma is happy…” I agree. I actually just came from family law court this morning after being asked to testify about an appraisal. It’s so raw in there. So many lives are changing and people are just going through it. So if some upgrades is going to help, that’s okay in my book….
In some sense if people can realize upgrades very rarely give back 100%, it takes the pressure off. People should do what they want if they plan to live there for a long while. Of course if you get too personal and do everything with a zebra theme, that might not fly if the home has to go to the market. No offense against zebras of course… 🙂
Very helpful post I’ll be sharing with my real estate clients.
Interesting about the first tub. We see these in Sun City Roseville periodically and I think they can be so useful. But, like you, I do hear that many people take them out once the escrow closes and replace them with traditional. A better option might be an easy accessible roll-in shower. Those are especially wonderful for buyers and their family who are using wheelchairs yet still useful and practical for all buyers.
Thank you so much Kaye. I’m actually so glad you brought up Sun City. Something like this could be a win for Sun City maybe because it’s an active adult community. This just goes to show the market could respond differently to a tub like this depending on the area. I think when younger buyers are looking at homes, this type of tub is just not something on the radar. I could see it being much more relevant though in Sun City. I don’t think I’ve seen one in a house I’ve appraised there, but I’ll be sure to pay careful attention. Thanks.
Mr. Kristensen made excellent comments.
I think the “You’ll get your money back” comes from the contractors. One friend was told he’d get three dollars for every dollar he spent and he believed the contractor. I tried to explain that the flippers try to spend money only on things that add to the sales price and they try for one or two dollars for every dollar spent. This has became a ‘fact’ to contractors when they are selling a job.
I say that if you live in the house and are planning on selling soon, only do what is necessary and don’t install any cutting edge items.
Thank you Paul. I really appreciate your take. By the way, now that you have a comment on the blog, you can post anything without moderation. The first one is always moderated because I get too many spam comments.
I think you are right about value claims coming from contractors. I think we see something similar with solar salesman. “Hey, this $20,000 system will add $20,000 of instant value to your house.”
The truth is many investors make their money by getting the property at a discount and then having a discount on labor / materials. Thus regular home owners can try to replicate what a flipper does, but it’s just going to be more expensive.
Great information as always! I love these types of publishings but, and this is a big one, only use them as a source of discussion. When you have a 3rd party resource to reference I feel it helps with creating an easier discussion with clients. I use these as a tool and part of the larger conversation to help guide a client in making informed decisions to achieve the best results for them.
I completely agree Richard. Thank you for saying it clearly. These are interesting to look at, but I would never recommend using the actual numbers for real estate decisions without local research and serious thought. I like the way you think. Thank you again.
Ryan, go ask your sons because I suspect that kids (well, at least my kid) think step-in tubs are awesome and think they’d be fun to own. And we never really have considered their point of view, have we? lol
Ha, thanks Anne. Yeah, I think they’d be on board for sure. Heck, having a craft beer while in a tub sounds pretty amazing to me too. 🙂
It’s about location. See, step-in tubs ought to be in the hall bathroom, not in the master bath… and its cheaper than a pool or Disneyland vacation… and is there for you later when you need it 🙂
Interesting that you include a picture of the walk-in bathtub. I actually have had two properties that I looked at recently that had this type of tub. I’m with you and curious as well as to where they get their figures on the return for the improvements. It would be interesting to see their methodologies for arriving at those numbers. By the way, I think Ollie probably adds about $10,000 in value. We’ve got a rescue dog too and she’s priceless. 🙂
Thanks Tom. I agree with you on the figures. How cool that you are a rescue dog owner too. Yes, Ollie definitely adds value. 🙂
One way to dispose of the notion of cost equals value are sales. Not comparable sales, but retail sales. If your neighbor was a shrewd negotiator and got the same remodeled bathroom for half the price is it worth half as much? If your spendthrift neighbor on the other side paid twice as much, is that bath worth twice as much?
I love it. That’s a great way to put it Steve. Thank you.
This is so interesting! Your bathroom looks identical to the layout of ours in Arden Park. We just finished remodeling it and did exactly the same thing (turned the old shower into storage space). We also took out a load baring wall, gutted the kitchen completely and added on about 50 square feet. We will likely refinance soon with the hopes to pay for another addition, but my husband and I are def a little nervous about what the appraiser will come back with vs what we’ve put into it. ?. We purchased this house last summer.
Thanks Bethany. Very cool to hear you did the same thing with the former shower. We are loving ours (especially since it’s now stained dark). Congrats on all the work you’ve done. I hear you on feeling a bit nervous. I think that’s normal. Arden Park can be a bit challenging in light of such a disparity in pricing from street to street too. For what it’s worth, here’s a document you might consider using when you interact with the appraiser to help tell the story of your property. It might help you organize some thoughts and list all the improvements (with costs). If it’s relevant, feel free to use it. https://sacramentoappraisalblog.com/2014/11/18/a-cheat-sheet-of-information-to-provide-to-the-appraiser-during-a-refinance/
Keep me posted if you end up having any questions. Best wishes.
Thanks for a great article, Ryan. Can you please address the reality or fantasy associated with the HGTV shows, where Jonathan, Drew, Chip, Joanna, et al invariably make a $50,000 profit after their $50,000 renovation? This happens week after week, and many homeowners expect this kind of reward.
Thanks Dan. I hear you. If only it were that easy to buy a $150,000 house, add $25,000, and then sell it for $430,000… This is why people get into flipping homes only to find it’s much more difficult than it looks on TV. After all, sometimes people buy and lose money and other times they say, “I made $5,000 for three months of work….”
I think the part many people don’t see is investors often make their money on the front of the deal by acquiring the property at a discount. These days there are hardly any good deals on MLS since the foreclosure crisis has subsided. So investors just don’t have room to flip like they used to (buy low, sell high). This is exactly why the bulk of investors in my market are having to find good deals elsewhere off MLS. They definitely do make money, but a huge part of their win is acquiring the property at the right price. I don’t think the public realizes that.