One Improvement Too Many?

I was out showing a house to a contractor for a buyer today. As they toured the house and sized it up for renovations, we spent a lot of time chatting about the market, strategies for prospering, and building wealth through real estate.

While I'm not enough of a typist to cover everything that we said, I would like to pass along a few of my impressions of the conversation. Keep in mind that I am the agent of the seller, and therefore not working "for" this buyer.

As a little background about the property, it is a nice entry level home in a suburb of Atlanta. It has a pretty good sized yard, and reasonable location. It has been partially remodeled, but some of the work is a little less than desirable. The kitchen was done a bit too cheaply, but the new windows are really nice. It is priced at about $190k in a subdivision that ranges from $160k to $235k.

The buyers wanted to talk about "completely" redoing the house. Replace all of the carpet with hardwoods, tear out the entire kitchen and start over, as well as re-do all three bathrooms. Finally, they want to remodel the lower level into a new master suite. The cost of the renovations looked to be around $40k. Frankly, I think it would end up closer to $60k by the time it was done. I also think it is too much to spend on the house. The house is currently worth about $200k, but the sellers need to get it sold, so it is priced competitively. After the renovations, I think it would only pick up about $25k to $30k in value.

Now, normally I wouldn't present too much of an objection to that proposition. After all, if one is going to buy the house and live in it for a good long time, then much of the value of the renovation is made up in increased livability. In this case, the buyers are looking to move up the property ladder, or use it as a rental property after they buy their next house. Since that is their situation, I think that spending closer to $10k on the house would be a better investment.

So, the tidbit is this: Don't over-improve a house unless you are willing to not be able to recapture the cost. Spending money (especially on kitchens and baths) can greatly improve the value of the property. However, building it past the norms of the neighborhood isn't such a great idea. Granite counters, limestone showers and commercial stainless appliances are cool. They add value to a home. However, they may be out of place in a mid-priced area if you are expecting to recoup the investment.