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Which Remodeling Projects Pay Off?

Feb. 20, 2012 at 11:08 AM   |   Comments

For the first time in three years, not one project makes a profit in the latest annual national survey of remodeling and repair project costs versus resale values. The average return on remodeling expenditures is lower than last year.

Every year Remodeling Magazine and Realtor Magazine team up to conduct a study that includes both construction costs and resale values, as determined by a survey of several hundred Realtors. study looks at the various value added of mid-range and up-scale projects, with the typical costs and value added. Over the years, the study has become the bible for contractors and real estate professionals to compare cost and value in changing market places.

Over the past two years, the anemic housing economy has taken its toll on resale value. Popular projects like remodeling a bathroom have gone from $17,857 in resale value in 2008 to $10,668 today and their cost vs. value ratio is down from 74.6 percent to 57.2 percent. Kitchens have fared better; a major kitchen remodel returns $40,126 or 68.7 percent of cost today compared to $43,030 or 76 percent in 2008. The top 10 projects in the 2011-12 ranking show a cost-to-value ratio of between 69 percent and 78 percent, for an average of 71.6 percent; that's down from the top 10 average of 75.8 percent in the 2010-11 rankings.

Construction costs in the 2011-12 Report continued to drop, though at a slower rate than last year. The drop in resale value, however, more than compensates, resulting in an overall cost-value ratio (orange) of 57.7 percent. This 3-point slip is smaller than last year's 3.8-point decline and may signal that housing values are nearing the bottom.

The top 10 projects in the 2011-12 ranking show projects recover between 69 percent and 78 percent of their costs, for an average of 71.6 percent. That's down from the top 10 average of 75.8 percent percent in the 2010-11 rankings. Once again, replacement projects continue to perform better in resale value than other types of remodeling projects seven of the top 10 are occupied by siding-, window-, door-replacement projects. The high value of replacements is partly due to their relatively low cost — with the exception of the roofing projects, all replacement projects are priced at less than $19,000. In addition, most replacement projects immediately improve curb appeal, which is a strong subjective factor among home buyers. Finally, the use of durable, low-maintenance materials in replacement products appeals to home buyers who increasingly are looking to reduce both the operational cost and maintenance cost in their homes.

Among discretionary projects, the Attic Bedroom remodeling project is in the top 10 for the third year in a row, despite being the most expensive project in the top 10, at an average cost nationally of $50,148. One possible reason for the high value placed on this project, which is ranked third overall (72.5 percent), is that, of all of the projects covered in the report, it is the least expensive way to add a bathroom and bedroom, and it does so within the home's existing footprint.

It's worth noting that Minor Kitchen Remodel is fourth overall (72.1 percent), two places better than last year. At a cost nationally of just under $20,000, this project is the least expensive way to give an existing kitchen a complete facelift. In fact, it is the interior version of a replacement project, and includes new cabinet door and drawer fronts and hardware, new countertops, and new appliances. Not surprisingly, since 2004, when Minor Kitchen Remodel was added to the project list, it has been the best-performing kitchen and bathroom project in every year but one.

The projects in the lists below are ranked by current resale values. Since we're at or close to the price bottom, hopefully resale values with soon improve and so will the financial viability of many of the projects in this year's survey.

Five Best Projects Buck for Buck

Siding Replacement (fiber glass/cement).. One of only four upscale projects in the top 10, the Fiber-Cement Siding project has been in the No.1 spot for six of the seven years since it was added to the At a cost of $13,382 and a value of $10,707, siding comes in at 78 percent of the cost.

Entry Door Replacement. Remove existing 3-0/6-8 entry door and jambs and replace with new 20-gauge steel unit, including clear dual-pane half-glass panel. At $1218, the project makes back $903 for a 73 percent cost-value ratio.

Attic Bedroom. Among discretionary projects, the Attic Bedroom remodeling project is in the top 10 for the third year in a row, despite being the most expensive project in the top 10, at an average cost nationally of $50,148. One possible reason for the high value placed on this project, which is ranked third overall (72.5 percent), is that, of all of the projects covered in the report, it is the least expensive way to add a bathroom and bedroom, and it does so within the home's existing footprint. Along with basement remodel, attic bedroom remodel represents good value to home owners looking for additional space. Both projects add living space and a bathroom within the existing footprint of the home, and both make good use of space that would otherwise be used only for storage.

Minor Kitchen Remodel is fourth overall (72.1 percent), two places better than last year. At a cost nationally of just under $20,000, this project is the least expensive way to give an existing kitchen a complete facelift. In fact, it is the interior version of a replacement project, and includes new cabinet door and drawer fronts and hardware, new countertops, and new appliances. Not surprisingly, since 2004, when Minor Kitchen Remodel was added to the project list, it has been the best-performing K&B project in every year but one.

Garage Door Replacement jumped from 13th to sixth, partly because the average cost of the project dropped more than 15 percent nationally; (71.6 percent).

Five Worst Bangs for the Buck

Home Office Remodel. Working from home has its advantages but fixing up a home office is a cost that doesn't pay off. In fact, at 45.8 percent, remodeling a home office has the worst cost to value ratio of any project in the survey.

Backup Power Generator might be a must in tornado and hurricane areas, but it's the second worst value in the survey. Installing a modular electrical backup system with capacity for providing 70 amps of emergency power in two 240-volt circuits and six 120-volt circuits costs $14,718 but recoups only $7136 for a 48.5 percent cost to value ratio.

Sunroom Addition. Constructing a 200-square-foot sunroom addition, including footings and slab-on-grade foundation, pays off poorly today. At a cost of $75,224, it recoups only $36,354 at sale, for a 48.6 percent value.

Master Suite Addition. You can lose more money by adding an upscale master suite than any other project on the list. A $232,062 investment turns into only $122,570 when you sell, a 52.7 percent cost to value ratio.

Bathroom Addition. Adding a bathroom used to be one of the best ways to add value to a house, but today, you'll be lucking to realize half of your investment. At a cost of $78,407, an upscale addition will recoup $41562, a 53 percent cost to value ratio.

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