Meet the Bahaj family.

Jake and Rachel Bahaj have been married for five years, they have two kids, and rental apartment living is no longer comfortable. With a steady increase in income and savings, they decided it was time to buy a home, both as an investment and a quality-of-life upgrade. Living in an out-of-town community (read: not New York), their budget for the home is $300,000. After scouring the market, they found that the homes in their price range were either too far from the Jewish community, too small, or in bad shape. In the end, they settled on a quaint 3 bedroom fixer-upper for $200,000 on the outskirts of the expanding religious community, which left them $100,000 for renovations. Assuming that Jake and Rachel will move to another home within five to seven years, how should they spend the $100,000 to maximize the future resale value of their property?

Home improvements definitely affect the value of the home, but there are many variables in the equation. The percentage of the remodel cost that will be recouped in the sale fluctuates based on the market, region, and the particular type and scale of the project. Unfortunately, in the past 10 years, home renovations are no longer the profitable investments they once were.According to Forbes magazine, “In 2005 renovations would, at the very least, recoup their costs on resale. Nowadays almost none do.”

Another factor is the timeline. The longer you live in your home, the more likely you are to recoup the costs of renovations, as home prices typically rise 5 percent per year. But time is a tricky bet, because as property values increase, the appliances depreciate in value and styles become dated and outmoded. Kermit Baker, director of the remodeling futures program at the Joint Center for Housing Studies at Harvard University, calls this “stylistic depreciation,” and explains, “All the fads now are for knocking down walls and making big rooms. But 10 years from now, that might not necessarily be the case.”

Spending Less, Spending Wisely

Back to the Bahaj family, Rachel has unique and funky tastes. She would love to incorporate vibrant colors in her kitchen; her dream kitchen includes various shades of purples and greens. She wants to completely knock out the old kitchen and replace it with a major upscale kitchen remodel, including a new layout, high quality cabinetry, top-of-the-line appliances, and a large island with seating. Jake would love to convert a bedroom into a home office and study, with a built-in desk, storage and shelving. They both want to add a pool in the backyard for a fun summer activity.

Not so fast! The Bahaj’s are making several big mistakes in these initial plans. A home office ranks number one in the Forbes list of “Ten Worst Home Improvements for The Money.” With an average cost of $28,000 and a resale value of only $13,697, the sellers only recoup 48.9 percent. Understandably, most buyers don’t have a need for a home office and would prefer every room to be as multifunctional as possible. Similarly, when it comes to a pool, one man’s fun is another’s safety hazard and annoying maintenance expense. Depending on the region, a pool could actually detract from the resale value.

Remodeling magazine provides more examples of the subjective value of renovations: “Changing how a space is used may meet the immediate needs of the current homeowner, but may be at odds with what prospective buyers are looking for. Converting a small bedroom into a grand master bath, for example, may be perceived by a prospective buyer as the loss of a bedroom rather than the gain of a luxury bathroom.” A general rule is that buyers appreciate a blank canvas; customizations that restrict functionality are not always advantageous.

In terms of Rachel’s kitchen makeover plans, her error is twofold. Firstly, any renovation with resale in mind should be geared towards mass appeal in style and color. That means out with green and purple, and in with safe neutral colors. The second point is that investing more money in upscale renovations doesn’t pay off as much as midrange projects. In a cost versus value analysis, Remodeling magazine found that “a kitchen ‘face-lift’ – painting, refinishing surfaces, and upgrading appliances – will return more than a full redesign. The key to spending less is spending it wisely.” Jim Cory, senior editor of Remodeling magazine advises, “If you take $20,000 and spend it judiciously on a kitchen, you can make it look a million times better. The design and product selection are key.”

A Calculated Renovation

Fortunately, Rachel and Jake do some research before jumping on their original plans. They decide to renovate in the smartest way possible to both enjoy a customized, updated, remodeled home for the duration of their stay, and also to make their property more attractive and profitable for resale in the future. Following Baker’s dictum that “people buying a house look first at kitchens and baths,” they opt for a midrange minor kitchen remodel at $20,000, and two bathroom remodels at $15,000 apiece.  And in order to provide more living and sleeping space, they spring for a full basement remodel with the remaining $50,000. Based on the 2014 national averages from Remodeling magazine, a minor kitchen remodel will recoup 82.7 percent of the job cost, the bathrooms recoup 72.5 percent, and the basement 77.6 percent. Of the $100,000 spent on renovation, the immediate increase to the resale value is $77,000, valuing the property at $277,000.

But wait! In an unexpected plot twist, before the contractors get towork, the Bahaj’s win $100,000 in a raffle. Giddy with this newfound fortune, Rachel and Jake consider putting this money towards more extensive renovations. Bad move! Pouring so much into a property that its value exceeds the neighborhood maximum will price it out of the local market. Israel Ramos, a real estate agent, explains, “Don’t exceed the ceiling for the neighborhood, or you won’t get your money back.” Luckily, the Bahaj’s realize that putting another $100,000 into their home would be foolish and they graciously donate the money back to the tzedakahorganization that held the raffle.

A Happy Ending…With a Warning

Five years pass quickly for the Bahaj family. Their small Jewish community grows and overflows into the surrounding areas. No longer on the outskirts, their home is now in a desirable central location in a thriving religious community. Instead of the average
5 percent annual increase, their home’s value increases a whopping 7 percent per year. Having outgrown this house, the Bahaj’s put their home on the market and it is now valued at over $388,000. Luckily, due to the strong market and high demand for housing in their neighborhood, the Bahaj’s sell their home at a hefty profit.

Yet, this happy ending is not a sure bet, as uncertainty canstrike at every turn. Carl Vogel of This Old House Magazine cautions:

If you think a project will pay for itself, but just barely, be prepared for something to tip the balance against you. Home renovation is rife with “hidden” expenses: the extra costs when a project takes longer than planned; the experts’ fees for asbestos testing or heat-loss
calculations; the monthly interest payments for a home-equity loan. Not to mention the higher property taxes you may have to pay when your new-and-improved home isreassessed.

On top of that, there is no crystal ball to judge the market climate at the time of the future sale. Vogel continues, “When all is said and done, most experts counsel against home improvement as an investment. Be smart about what you spend… anew deck isn’t a mutual fund.” And, as always, every experience is unique. While the statistics on the value of home improvements come from a highly regarded survey conducted by Remodeling magazine, nevertheless, Jim Cory, the editor responsible for the survey, clarifies, “We provide a benchmark with our study. Cases have to be decided on an individual basis.”

With all of those disclaimers to balance out the happily-ever-after story of the Bahaj family, we can find a happy medium in which to base our plans and decisions when it comes to home improvement. And maybe that dream remodel is not so out of reach considering that, if done right, a significant percentage of the cost can be defrayed at resale.