How Valuable Are Home Improvements?
By Charlie Elliott, MAI, SRA

I wish I had a quarter for every time I heard somebody tell me, “I’ve spent more money on this house than you appraised it for.”

I don’t feel I’m alone among real estate appraisers. The majority of homeowners seem to think that their real estate is worth what they paid for it, plus the money they invested in additions and improvements to the house, as well as appreciation in value for their property. Some of these homeowners are correct, but others very well may be in for a rude awakening. The bottom line is this: When people purchase a home, their investment is not a guaranteed profit. Sometimes homeowners lose money on their real estate property.

The comment I quoted in the first line of this column is most often directed to someone in my profession who has appraised a house, less than two years old, in a new-home community. It also happens when one appraises older homes that have been extensively remodeled or homes with improvements added to them that don’t contribute as much to the home’s value as their cost.

Let’s start with the first scenario. If you buy a house in a new-home development, you can’t expect its value to appreciate if you decide to put in on the market while the developer still has brand new ones for sale. You are competing with the developer and you are trying to sell “used merchandise” compared to the developer’s “new product.” Unless the developer has increased prices on the unsold units, you may have to sell a perfectly good home at a lesser price than you paid for it.

Now for the second scenario: the “contribution to value” of additions or improvements is less than the price for getting them done. This goes against the theory that many people have that money spent on home improvement will add more than the expenditures to the home’s value. True most, if not all, enhancements to a house will add to its value, the addition will not necessarily be as much as the cost of these improvements.

An excellent example of real estate value not being significantly improved by expenditure is the addition of a swimming pool in a house with a colder climate, like, for example Bismarck, N.D. There is not a huge demand for swimming pools alongside houses in North Dakota, so if a homeowner has one put in his yard before putting the house goes up for sale, he may be shocked when he discovers that the pool actually decreased the value of the house rather than increased it. The maintenance cost of a swimming pool in that part of the country more than offsets the benefit of such an amenity in most people’s minds.

Recently, Realtor Magazine ran an article which averaged cost of potential home-improvement projects and estimated the value added to the home when sold, assuming the home was sold shortly after the improvements were completed. The figures reported in the article are listed below.

The above figures represent averages for real estate properties located throughout the United States. In other words, these figures don’t necessarily reflect the prices and values of wherever you are. For example, the swimming pool I mentioned earlier in this column could very well be an asset to a home’s value in a warmer climate like those in Florida or Arizona. Nevertheless, these figures indeed show examples of gains or losses a homeowner can experience.

I did not participate in this survey, and cannot guarantee how accurate these figures are. But I must admit that, from my experience, these figures appear to be very realistic.

Therefore, I recommend that homeowners who are considering making improvements on their property, look into what they can expect these improvements to add to the value of their house and compare that figure with their cost estimates. Perhaps for them it would be wiser to sell the house in its “as is” condition and buy one with the features and amenities they are looking for. It may, after all, save them a lot of disappointment.

Charlie W. Elliott, Jr., MAI, SRA, is President of ELLIOTT® & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or at charlie@elliottco.com or through the company’s Web site at www.appraisalsanywhere.com.