What does it mean to “over improve” a property? Here’s an example.
Mark and Jill Owen own a home in a very nice neighborhood, close to good schools. All the homes were built in the early 1990s by a builder of good repute, who developed a subdivision of three and four bedroom pool homes, ranging from 1800 to 2600 square feet. The Owens paid $275k for the property seven years ago.
The Owens’ business has boomed the past couple of years, Jill’s been watching “Property Brothers” on HGTV, and they decide it is time to enlarge and update their home. The first step was to expand the master suite to create a truly sumptuous, spa-like bedroom, bath and his & her walk-in closets. The new master bath included a walk-in shower with a river rock floor and travertine marble on the walls and ceiling, plus steam and full-body sprayers. Oh, they went for the oversized jetted spa tub, too.
All the other baths and the kitchen got new custom wood cabinets with expensive granite counters and top-of-the-line sinks and faucets. Naturally, the kitchen got a new matched set of high-end, stainless steel appliances. New impact-rated windows and plantation shutters throughout added a whopping $50k to their renovation expense.
Jill really loves the travertine marble in the new master bath, so they decide to redo all the original flooring with travertine tiles. They also have the contractor install new and fancier baseboards and crown molding throughout the home, giving it that final touch of fabulous elegance. As for the home’s exterior, the pool got refinished with Pebble Tec, complementing the gorgeous pavers and new waterfall added next to the spa. New landscaping, front and back, of course. And the finishing touch was a full outdoor kitchen!
You say “Awesome! Sounds perfect…I want that house!”
Not so fast. If Mark and Jill think there is a chance they might be selling in the few years, there is a very strong likelihood that they will not get back their investment – not even close. (Check out Remodeling magazine’s annual cost vs. value report.)
When it comes time to sell, the real acid test will be…what are the typical updates that have been done to the other homes in their neighborhood? If the Owens are hoping to get $525k – which doesn’t quite recoup what they spent – but the other recent sales in their subdivision were in the $295k range, they are going to be in a world of pain. Mostly because the agents representing potential buyers will tell them it is overpriced for the neighborhood. Even if a buyer makes an offer close to their asking price, the lender’s appraiser will be comparing the Owens’ home against the condition and size of homes that recently sold in their neighborhood in order to determine an opinion of value. And that’s the whole shooting match.
Of course, if Mark and Jill plan to stay in their tropical paradise for decades to come, well, what the heck. They might as well enjoy their success and their home!
Although…if I was acting as their trusted real estate advisor, I’d have strongly suggested a better strategy. Make a few updates that will help net a higher sales price, in line with current values in their neighborhood. Then sell the house and reinvest the equity plus what would have been spent on home improvement to purchase a home in a neighborhood where all the homes are of comparable value and luxury.
It really comes down to what the real estate-savvy have always known: don’t have the biggest and most expensive house on the block!Google+