Do Home Renovations
Pay Off at Resale?

Question: We have just purchased a waterfront home in Southeastern Massachusetts. The home has many design problems that we are correcting. My concern is that we may "overinvest" in this property.

Here are the specifics:

The purchase price was $425,000. At the time, the bank appraisal came in at $500,000, so we thought we were in good shape. We are adding a stand-alone garage with 656 square feet of living space above it; expanding two floors of the 2,800 square- foot house to achieve 3,080 square feet in total. This addition will open a kitchen to a full eat-in area with center island, dining area and extended views of marshland. It also includes added space for a master bedroom suite and connects two upstairs areas so that all three bedrooms are on second floor. I expect the total renovation project to come in at about $125,000.

For resale purposes what are you thoughts regarding these improvements (relative to increased value)?

Answer: Because of the recent boom in residential real estate, homeowners across the country are feeling comfortable with putting in additions. Because home prices are going up, they feel certain they will get their money out.

However, with any home-improvement project, there are at least three questions that you must answer:

1. Will the project add value over and above the anticipated increase caused by home market inflation? In other words, if your home goes up in value $50,000 if you did nothing, how much more must it appreciate to justify your spending, say $25,000 on improvements? The answer is that it must go up a total of $75,000. If it doesn't go up that far, you've actually lost money by putting in the addition!

2. What are the neighborhood norms? You say you are expanding the square footage and opening up a kitchen area, adding space to a master bedroom and changing the overall floorplan. All of these sound like good projects. But, what are comparable homes like? If they are larger than yours or have already been upgraded, then very likely your addition will prove out. On the other hand, if you make your house overly big and expensive for the neighborhood, you will have created a white elephant -- a home that's too expensive for its area. The reality comes home when you try to sell a white elephant and no buyers will pay the price you feel you must charge to cover your improvements. Check with neighboring homes for comparisons.

3. Will the project so improve your lifestyle, that it's worth doing, even if you can't justify the cost? Sometimes, you just want to improve your house so you can live better. Some houses ache for improvement. Yet, they don't justify it. Be careful not to over-improve. For a list of projects that will bring you back close to as much or more as you spend on them check into my book, "Tips & Traps When Renovating Your Home" (McGraw-Hill, 1999).

Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Buy Your First Home," (Dearborn, 2000).

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Pattie, Boston

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