Pitfalls of (Over) Improving Your Home

ONLY SPEND DOLLARS THAT PRODUCE A RETURN. SAVE YOUR $ FOR YOUR NEXT HOME!

by Hal Feldman (MiamiHal.com)

When you sell your home, you’ll expect top dollar for all the love and care you put into it, right?  Well, it is important to understand there is always a difference between how you value the home and its true market value.  To minimize this difference, it is important to understand the “improvement effect.”

Someone once told me that owning a home is like living in a bank account.  At many levels, this is true. You get to enjoy a living space, which is also a great investment vehicle. And, in this same metaphor, if you just maintain your home, keeping it in approximately the same condition you bought it, you should expect “interest” to accumulate, which becomes your profit when you sell.

However, should you improve your home in any way, you start to distort a home’s value.  I call this the “improvement effect”.  When you go to sell, the amount of under or over improvement to your home (as compared to neighboring homes) can, and will, create a delta between market value and what you believe your home is worth.

The golden rule to remember is that you are less penalized for under improvement than you are for over improvement.  Yes, you read that right.  Buyers will pay about the same for an under improved home in a neighborhood as they will for an average home in the neighborhood. Over improvements are often not calculated at all in an offer price.

So, the philosophy to adopt is if you derive enjoyment from the over improvements you make in a home than this only adds to the home’s ‘lifestyle value’, not necessarily to its market value. This is also true of unique customizations.  If you put in a motorized doggie-door or a sliding glass door internally connecting two bedrooms, you are not likely to find a buyer who will value those improvements.

Next, homeowners must understand there is a difference between maintenance and improvements.  Buyers will value a home that is cared for and does not have deferred maintenance.  A home’s sale price will be more affected by deferred maintenance than it will improvements.

So, to realistically understand the value of your home and what it ultimately will sell for, you need to step back and look at your home as a commodity.  Think of it as a car.  If you’ve regularly changed the oil, it’s mechanically sound, and tires are in good shape, you are likely to get a good resale value.  If you left it stock, great.  You can use the Kelly Blue Book to estimate its sale price.  However, if you installed custom tinting, a tracker/alarm or high-end stereo system you’ll likely get no added value on trade-in.

There is no perfect way to get the exact value for your home.  Every buyer sees a little something different when they tour a home.  However, your Realtor® lives and breaths the local market every day.  It is our job to give you a realistic approach to pricing your home.  While it may sometimes be difficult to hear, market value is market value.  You can prepare yourself by assessing each improvement’s “lifestyle value” and deciding if that fits into your philosophical balance between living your life and realizing profit in a home sale.