Wed, June 03, 2009

Time to Consider Renovating Your Home

There are several considerations that could make this a perfect time for you to plan and carry out a renovation.

Building contractors are looking for work
With new home construction at record lows nationwide, contractors are likely to bid more competitively in order to keep working.  A few years ago in the Boston area, contractors wouldn’t even return your phone calls, but it’s not that way now.  The degree to which contractors are willing to bend will vary by locality, but in most areas they’re more willing to negotiate than they have been in a long time.

You plan to live in your home another 5-10 years or more
I’ve never believed in doing renovations just to increase a home’s short-term resale value – most people don’t know how to do this effectively.  With the exception of foreclosure experts, these days doing profitable home rehabs is beyond most people’s ability.  Usually, if you renovate a home that’s in basically good condition, the renovation cost will exceed the value added to the house.  Take a look at Remodeling magazine’s annual “Cost vs. Value” report and you’ll see that most renovations result in value increases of only 50-90% of the renovation’s cost.  There might be situations in which a renovation could make your home sell more quickly, but you’d need expert advice about housing in your area to carry this off successfully.

If you’re going to do a renovation, it should provide something that you want or need and that your family can use and enjoy for several years.  In the mid- to long- term, a renovation will add to your home’s resale value, but that shouldn’t be your primary reason for renovating.

You have a renovation in mind that will make your home more marketable in the future
At some point, you will sell your home.  Adding a third bathroom in a neighborhood where houses have two or fewer may not make your home more desirable to a future buyer.  Depending on where you live, adding a pool could actually make a home difficult to sell.  Unless you know a lot about real estate, you should consult a real estate professional familiar with your neighborhood to be sure that the renovation you want won’t become a liability someday.  If you really want to do a renovation that’s going to make your home harder to sell, you should at least know that beforehand so you can take it into consideration.

You can afford to fund a renovation without taking on more risk
I saved this for last because it’s by far the most important consideration.  Doing a renovation in the present economy involves considerable risk, and you may need professional advice to be confident that it’s a wise thing to do.  Unless you’re in a very strong financial position, now is not the time to do a renovation.  But if your emergency fund is full, your employment looks stable, you need to make your home more livable, and you have the capacity to fund a renovation, it’s worth serious consideration.

In the current economy, a renovation should be paid for from surplus cash.  Perhaps if you have considerable equity in your home (more than 75%), it might be OK to borrow a small portion of your home’s value if you have more than enough excess cash flow to handle the debt.  However, you should be extremely cautious about borrowing to renovate in the present environment.  It’s likely that housing prices in some areas are not done dropping; you could renovate your house and still see its value decline.  If you aren’t in a position to bear such an risk, then renovating isn’t for you.

This post was included in The 208th Carnival of Personal Finance: Lobster Roll Edition