June 26, 2018 / 12:14 PM / in 5 months

Your Money: Mental math needed to evaluate home renovation value

NEW YORK (Reuters) - You hear it all the time: if you put money into home renovations, you will make it back when you sell.

FILE PHOTO: A worker removes paint on the balcony of a Tudor-style home that is being renovated for resale in the Silver Lake neighborhood of Los Angeles, California August 5, 2013. REUTERS/Jason Redmond/File Photo

Yet given the current dynamics of the U.S. housing market, separating out from the asking price the exact amount you spent years ago on subway tile or granite counters can be daunting.

“Practically speaking, it is very difficult to have that data set,” said Nino Sitchinava, principal economist at Houzz.com. “There is a way to isolate the value of, say, a bathroom, if you did rigorous statistical analysis and control for different house features.”

More likely than not, what drives your listing price is whether you live in a hot market and the inventory of the neighborhood. So what is really going on when figuring out if your renovation was money well-spent requires some mental mathematics. Homeowners are often trying to justify the amount they want to spend on renovation projects, projecting the price appreciation they will reap down the road. But this is not real money that can be quantified, and sometimes people lose.

Tracie Hovey, a public relations officer from Waynesboro, Pennsylvania, spent a bundle fixing up a house with her husband a few years back, adding up what they thought they would get out of it. They ended up selling the home at a loss of more than $100,000.

When the couple moved recently to another house, this time an outright fixer-upper, they did reverse mental math to figure out how to discount the price for all the work that was needed on it, particularly on the kitchen, Hovey said.

FACTORING IN

Half of the nearly 150,000 U.S. homeowners that Houzz surveyed in spring 2018 said they were going to be working on home renovations this year, with a median spend of $10,000. Almost all of the money for this work is coming out of cash, with just 11 percent saying they will get a secured home loan.

Most popular: Kitchens, followed by bathrooms, with guest bathrooms slightly outranking master baths.

If you are flipping houses, the return on investment for these upgrades is easier to assess. But homeowners are staying put longer, according to a new survey from HomeAdvisor.com, which found 84 percent of homeowners have no plans to move.

For longer-term residents, Houzz’s Sitchinava said what they are really measuring is homeowners’ “perceived” value of various remodels.

That means, if you live in a neighborhood where home values are on the rise, you might feel comfortable to go ahead and indulge yourself in a renovation, because you know you will eventually get paid back.

This is certainly how Alexander Lowry looks at the money he is currently spending to fix up a new house he bought with his wife near Boston.

“We would have been willing to pay higher for a house that needed nothing,” said Lowry, 41, a professor of finance at Gordon College in Wenham, Massachusetts. “But my wife is a personal organizer, so this is fun for her to put her own stamp on the house.”

While he plans to never move again, Lowry is pretty confident he would make money if he sells, and that is enough to make the costs work for now.

“What you want to do is get the next owner to fund your lifestyle now,” said Brad Hunter, chief economist for HomeAdvisor. “It’s hypothetical as to how much they are going to get back. But people are making improvements to their home with the notion in mind that they will get some of it back.”

Figuring out the true value of your renovation means looking at how much $10,000 would be worth if you kept it invested, rather than spending it. After 10 years, at 6 percent growth, you could have $18,000. Given that you would have had to pay capital gains tax all along, you might end up with around $6,800 in your pocket. (Note that you may also have to pay taxes on your home value appreciation eventually, too.)

So if you are wrestling with the question of return on investment, ask yourself: Are you getting that much enjoyment out of your upgrade?

Reporting by Beth Pinsker; Editing by Lauren Young and Matthew Lewis

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