Renovate or
Depreciate?
With the market in its current condition many homeowners are contemplating renovating their home vs. selling their home. With equity lines quickly becoming the next word to be deleted from Webster’s dictionary, this decision is much more difficult then it was just a few years ago. Will I recoup my costs? Should I just buy a renovated house? Can I rent my house and then buy? Do I want to go through a renovation?
The
first question a homeowner should ask him/herself is – “what is true Fair Market Value for my
home?” This can be a daunting
exercise, as it requires total honesty with your self. As we all know, most homeowners feel
their home is worth much more then it is.
To be sure you have a realistic idea of what F.M.V (Fair Market Value)
is for your particular home be sure to do the right research.
TIP – ZILLOW is wrong,
call a Realtor.
Now
that you have a fair idea as to what you can expect to obtain in this market you must calculate
your projected renovation budget. If you want to recoup your rehab costs in the
sale of your home you must be sure that anticipated appreciation is in line
with your budgeted amount. For
example, if a F.M.V of $300,000 home has a $30,000 kitchen renovation that home
needs to appreciate by 4% each year for 3 years to “repay” the renovation. A
more conservative equation may be to calculate using your current appreciation along with your anticipated renovation
budget. This will give you a
better understanding of how long you will have to remain in the home to have
the home pay for the kitchen.
If the number makes you cringe – it’s time to sell.
We
are currently in a remarkable buyers market. The option of selling and purchasing may work for you, even
if you have to sell at a loss. If
you have to take $25,000 to the closing table to sell your home but then obtain
a dream home for $50,000 under F.M.V – it’s a relative wash. Being able to “roll” a new kitchen
and/or bath renovation into a mortgage is also very attractive, giving better
rates and longer terms on the money “spent”. There are tremendous deals to be had; while you
contemplate it’s always worth taking a look at new inventory as well as meeting
with professionals.
