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Posted by Steve Graham | Oct 25, 2009

How to Calculate the Return on a Home Renovation

Home improvement resale value largely depends on region and neighborhood.

Thinking of remodeling a house to raise home value? Return on investment calculations for remodeling are complex and inexact. That doesn't mean you shouldn't do home additions and improvements to raise home value, but you should do thorough research first. Once you establish a firm cost estimate for a home remodeling project, consider the return value in terms of both personal enjoyment and real estate value. Neither can be precisely quantified but you can reach a rough estimate of the return on investment. Seek out expert advice and reliable figures, but also ask for local anecdotes. And always remember the real estate rule: Home value always depends on location, location, location.

Where to Research Before Remodeling a House

The annual Cost vs. Value Report is the most reliable and widely used guide for estimating return on remodeling investments. Hanley Wood and Remodeling Magazine publish the guide based on surveys conducted with members of the National Association of Realtors. The surveys ask about the changes in anticipated resale value based on specific remodeling projects. The results are tallied and listed as national and regional averages. The top national projects, according to the 2009 report, are:

  • A $10,000 deck addition, which is estimated to recoup $8,700 in boosted resale value.
  • A $10,000 siding replacement project, which will increase resale value by $8,300.

The poorest return on investment comes from a home office remodel, which recoups just 50 percent of the cost.

Pay attention to the cost estimates for each project on the Cost vs. Value report. Not all remodels offer the same home resale value. A new countertop will raise the home value, but a granite countertop may be nearly as valuable to a buyer as a much more expensive Italian marble countertop.

Regional Value Differences in Home Remodeling and Additions

In New England, unlike most other regions, window replacements are worth more than kitchen and bathroom remodels. On the Pacific coast, siding replacement slides way down the cost-value scale, and kitchen remodels top the list. Within regions and even within cities, however, there are further variations. Consult local real estate agents and experienced remodelers about the most popular and valuable projects in your area. Their estimates and experiences may differ from the Cost vs. Value report.

For example, Denver builder and remodeler Ben Maxwell disputes the report's estimate of high returns on basement remodels in the Rocky Mountain West. He said the average suburban Denver home has plenty of living space on the main levels, and a fancy basement won't draw much attention. However, he said decks and other outdoor areas can be a major draw in Denver, sometimes offering a return on investment above 100 percent. "Creating an outdoor living space is huge," Maxwell said. The average for the region is likely brought lower by other mountain states such as Montana or Arizona, where a harsher climate reduces the value of a patio or deck.

The Cost vs. Value report provides valuable estimates for the return on investment of a variety of home improvement projects, but adjust the numbers based on local expertise.

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