The Remodeling Trap

A couple of days ago we viewed a home that completely defied expectations. It was located in a somewhat low priced neighborhood. The average sales price over the last six months in this neighborhood was about $48 per square foot, which would put its value around $120,000 by my back of the envelope calculation. The aged and worn exterior was evident despite the fresh coat of bright yellow paint. The curb appeal was completely underwhelming.

Imagine our suprise when we walked inside and saw a completely different home. Wood floors in the living room and dining room. A spectacular marble and wood entryway. The kitchen had a beautiful antique modern look with stainless appliances, granite counter tops and marble floors. Upstairs was a huge marble bathroom with a gigantic soaking tub and separate shower. Even the second bathroom was adorned with marble and natural stones. It was a truly beautiful and well designed remodel. In the Houston market, one would normally expect to see this type of design in homes priced well north of $500,000.

Not the actual bathroom, but a good idea of what it looked like.

Since this was a rental property, the owners had most likely purchased and upgraded it for investment purposes. I am amazed by their lack of foresight. I am quite experienced with remodeling, spending the last few years remodeling my own home, so I know that a renovation of this caliber would cost at least $150,000. No matter how cheaply this house was purchased, there is no way you could make your investment back.

Any time you remodel and upgrade and existing home, you have to keep in mind the potential resale value. Of course if you are never going to sell and you love your location, put as much into your home as you want. It's your home and you should make it as comfortable as you want it. If you are eventually going to sell though, there is an upper limit to the amount of money you should expect to get back for renovations.

Your neighborhood is going to limit the potential sales price of your home, so you should always look into local market values to decide how much you should spend. A good rule of thumb is to never spend more than the difference between the lowest average sales price for comparable homes and the highest average sales price for comparable homes. Since every market is different, there are some exceptions, so it is probably a good idea to talk with a Realtor® before starting your renovation.