Cost Versus Value
By John Thomas
October is Renovation Month, as decreed by the Canadian Home Builders Association
to promote professionalism in the industry, and to remind the general public that since
youre probably dealing with your prime asset, maybe you want some professional
advice. Its a truism that, if you own a house, youre either renovating or
planning a renovation. (Or swearing youll never do this again.)
Maybe your renovation is merely fixing the front step. Maybe its a full-scale assault on the budget and your sanity. Probably something in between.
When most people think of a substantial renovation they usually go through a series of contortions deciding whether its really worth it.
There are many things to consider. Lets say youre doing a small addition, knocking out a wall between the kitchen and the addition and redoing the kitchen.
First and most obvious, how much will it cost? Second, the value of the renovation; will you get your money back when you sell? Maybe its better to sell now and move to a bigger house?
Next step, then, is usually to price the renovation, perhaps get an appraisal of your own house, and look around at whats available on the real estate market.
Lets say the renovation will cost $40,000. Will it add $40,000 to the value of your home? No. But then again, will you be able to sell, and get what you want in a larger home for $40,000? No. And then theres the hassle of moving, and anyway, the kids friends are here, you like the neighbourhood and Fluffys buried in the backyard
Renovating generally costs more than new construction because of the difficulty of coping with and trying to accommodate a pre-existing structure. But ironically, renovating the house you own is a much better deal than building new. This is because "used" housing sells at such a discount to the new home market. If you have your home insured at replacement cost, its almost certainly insured for more than you paid for it, and probably for more than its worth on todays market. In that sense, you can still spend a bundle fixing up the old wreck and come out ahead of the new homebuyers.
Once the decision has been made to stay, the expense of renovation looks a bit different. Sure, you might not (wont) get your money out if you sell next year, but over the long haul, chances are you will.
But there are other imponderables. The real estate market fluctuates. Interest rates fluctuate. Who knows what your house will be worth in ten years?
Another factor is the relative cost of renovating as compared to your home value. The cost of materials and labour is the same whether youre renovating a starter home or a mansion. So, in a way, it makes more sense to invest in the reno of a high-priced home, since the same investment represents a smaller portion of your equity. On the other hand, the renovations of mansions usually use more and more expensive resources.
And what, exactly, are you planning? Replacing those old plumbing pipes is expensive but doesnt show. Replacing an old kitchen is expensive but is a show-stopper. The kitchen has re-sale value, the pipe repair almost zilch. In renovations, theres always a debate about whether its "worth it," not just in the large concept but in each detail of the work. For example, high-cost slate in the entryway might be worth it if the entryway is small.
Over the years, my experience has been that people do, in fact, recover their investment in renovations. But the renovations need to be done to professional standards. Sloppy or ill-conceived work can actually detract from the value of a house. You know yourself your usual reaction when you walk into a house and the agent says, "Yes, the owner was very handy, he did the kitchen cabinets himself "
If you do decide to renovate, youre part of the majority. Renovations have outpaced new home buying throughout this decade and are predicted to do so for the foreseeable future. In recognition of this fact, the Ontario Renovators Council has produced a really excellent pamphlet called Standard Renovation Process which tells about everything from contracts to warranties and beyond. Its available from the Greater Kingston Home Builders at 384-3884 or our office: 547-6063.
John Thomas is President of Thomas & Co., a local Renovations firm. Call 547-6063, or visit the construction site at www.jkthomas.com. Thomas & Co. is a member of the Greater Kingston Home Builders Association.