Boosting the value of your home is never an easy task. It takes time, money, and—when your kitchen's covered in plastic tarp—weeks of pizza delivery. And with home prices still sliding in many parts of the country, getting a return on your investment is now tougher than ever. Luckily, there is a secret to smart remodeling in a buyer's market: do as much as you can with as little as possible.
Homeowners may have learned this lesson last year, when big spending on home improvement did not lead to big profits. According to Remodeling Magazine's 2006 "Cost vs. Value" report, prices for most remodeling projects increased last year while their resale value decreased. Major, mid-range kitchen remodels, at an average cost of $54,000, returned just 80.4% in 2006 vs. a 91% return on $43,862 in 2005. Even the most profitable project in 2006—upscale fiber-cement siding replacement—recouped just 88% of its total cost.
Americans spent $155 billion on home improvements and repairs in 2006, a 2.8% increase over 2005's total, according to Harvard University's Joint Center for Housing Studies. The Center estimates that we will spend over $160 billion in 2007, but if resale prices continue to lag behind remodeling costs, the pricey projects won't pay off.
Know Thy Neighbor
What's an ambitious homeowner to do? First, rule out needless projects by comparing your home to the others in your neighborhood. Ask your real estate agent for a list of homes for sale nearby so you can see what is being offered, and take advantage of open houses.
"You want to make sure you can turn apples into apples before you make any improvements," says Sid Davis, author of Home Makeovers That Sell: Quick And Easy Ways to Get the Highest Possible Price. "If you put in granite countertops and everyone else has laminate, your house could end up overpriced."
You will probably want to focus on the areas that are most important to prospective buyers—the exterior, the kitchen, and the bathrooms—and skip over frivolous renovations and additions of offices, sun rooms, and master suites. The least profitable project in 2006 was a home-office remodel, which returned 63.4% of remolding costs at resale.
Once you have narrowed down your options, stick to minor improvements. While major upscale kitchen projects, costing an average of $107,000, recouped just 75.9% of their cost in resale in 2006, minor kitchen remodels, costing $18,000 on average, did much better, with an average return of 85.2%.
Channel Your Inner Handyman (or Woman)
Of course, remodeling on a budget means more work for you. But do-it-yourself projects can have a major impact on a home's value, and they can be as simple as cleaning up.
"Have your mother-in-law come over and give you a report on how clean it is," says Davis. Then, starting with the front yard, eliminate all waste and clutter. Weed the garden and mow the lawn. Wash the siding and walls. Scrub the kitchen and bathroom. Shampoo the carpets.
"The cleaner, brighter, and more spacious a home appears, the quicker it sells, and for a lot more than a house in a 'homey' state," says Sharon Rizzo, principal of Chicago-based real estate investment firm Rizzo Realty Group.
For the handier among us, tiling can be an amusing way to perk up the kitchen or bathroom. Discontinued tile can cost as little as $1.50 per square foot, and stores such as Home Depot (HD) and Lowes (LOW) even offer tiling classes. Refinishing kitchen cabinets is also much easier than you might think. Sand, apply a lighter stain or finish (this will make the kitchen seem bigger), and replace old knobs and handles with new stylish ones.
When all else fails, a few coats of semi-gloss paint in a light color can go a long way, making your walls appear brighter and your rooms seem larger.
Do Your Homework
Given last year's smaller returns, the forecast for increasing your home's worth in 2007 may still not look promising, but your specific situation may put you at an advantage. "Many factors affect a home's value and, consequently, the resale value of any given remodeling project," says Pat Vredevoogd Combs, president of the National Association of Realtors, in reaction to the 2006 "Cost vs. Value" report.
As always, your local real estate market is one important factor to consider before remodeling your home. Last year, homeowners in the Pacific region (Alaska, Hawaii, Washington, Oregon, and California) saw the highest percentages of remodeling costs returned in resale. Minor mid-range ($19,000) kitchen remodels in that region recouped 106.4% of their project cost in resale, while mid-range ($15,000) bathroom remodels had 103.2% returns.
In general, hot markets, such as Seattle—which is expected to see a 3.6% increase in median home price and 4.7% jump in housing starts in 2007—usually see higher returns on home improvement projects.
A good agent can spot buyer turnoffs, advise you what to improve, and figure out your home's true worth based on the local market. If you have made all the necessary improvements and you still don't like what you hear, simply wait for the storm to pass, and in the meantime, enjoy the fruits of your labor.
"Real estate will always be a safe investment," says Rizzo. "If you can hold on to your property during the market's current state of softened appreciation, you will see the market turn in favor of sellers in the not-so-distant future."
Click here to see 10 home improvement tips for 2007.