Return on Renovations

I'm thinking that the return on the reno should actually be based on non-bubble costs (what would it cost today to do the same reno) minus a discount of close to 50% (used stuff) minus a "not exactly my taste" discount.

Yes, a return on the costs of renovations is great, but that is not the primary reason for upgrading. I did some minor but expensive renovations just to make the place more livable (e.g. adding lots of electrical lines, light fixtures, switches, custom closets, shelving, molding, trim, etc.) Before I did that, it was just a lifeless drywalled unit.

I won't see the returns on my unit, but I'm glad I did them nevertheless.

> I won't see the returns on my unit, but I'm glad I did them nevertheless.

of course, making the place livable is key for quality of life. I was talking about the widespread seller's expectation that the next buyer will pick up the cost of their renovations. Is still there?

it's all about how many people would be interested in the place before or after reno. i've seen places where people would run out of. if the owners did $20-30K of reno, their buyer pool would expand and they would've gotten closer to 200% return, if not more.

wouldn't the original example be a return of -20%?

I will admit that I have never done a renovation (my parents have done three), but having seen apartments that need work/need a complete renovation I think that you could do work and actually make a return on your money, you just need to make the right choices. Just spend as little money as possible for the items that will impact your apartment the most and spend more where necessary.

Putting in new floors makes a huge difference. It can also bring more light into a unit if they are light enough. Upgrading the kitchen cabinets can also impact how new a unit feels and you can get pretty decent looking stuff at Ikea. Outfitting the closets with an Elfa system (Container Store) will bring more usable space to your closets and allow you to put things away more efficiently as well as keep more stuff out of common spaces.

If you buy a custom designed, $5,000 bathroom sink for a studio apartment "because you had to have it," I would consider that a sunk cost. But if you look at your inexpensive options and choose something that would be appreciated by a lot of people, it will help you out considerably.

One of the biggest problems I have when selling an apartment is trying to 'neutralize' the space so that a wide range of people can walk in and see themselves living there. When a space has been designed with one person in mind, it will be harder to sell and the money put in for the work will probably be lost.

Example: I was selling an apartment with a 'roman' theme. It had a hand painted fresco ceiling with wild back lighting done by an artist that was flown in from Israel to do the work. The walls were velvet and mirrors. The seller thought that the apartment was worth MORE because of these additions and demanded a higher price. We tried to find "that perfect person" for the apartment, but they either didn't exist or didn't want to see it. The truth of the matter is that anyone buying that apartment would probably rip out the back lighting, velvet & mirrors and just put a coat of paint over the fresco. What probably cost $50,000+ for the owner was now a $10,000+ fix for the next buyer. Over-personalization will end up losing you money. (We never sold the apartment, btw.)

(Matthew Russell - Brown Harris Stevens)

I don't think blanket statements make any sense here. When the interiors are built, or are renovated, they have some lifespan. In NYC, that lifespan seems to be about 20-30 years. E.g., if a place was last renovated in 1980, the listing is usually accompanied with the line "bring your architect". No one cares to spend $2M and then live with peeling formica.

When you first put up that $200K renovation, if done generically, people will pay you 100% and then some to cover the cost of carrying an empty apartment for several months, and then some to cover the cost of the efforts of managing the renovation. That's why you see, even today, professionals who buy apartments, fix them, and then sell them. If I were in the market for buying an apartment, I would definitely rather buy one that was just-renovated to my liking (I don't have very specific tastes) than deal with the hassle and vagaries of doing a renovation myself. As time passes, the value goes down as it becomes used and old.

So say you have a place that was last renovated 30 years ago, and you decide to do a $200K renovation. Are you going to see a $200K pop in value immediately after the renovation? Absolutely, but this pop goes down to zero after 20-30 years. Say you buy a place that was last renovated 10 years ago, and you decide to do a $200K renovation. In this case, you won't see a $200K pop: your decision to renovate a 10-year-old place essentially threw away $100K of value still in that place, so you'd only see a $100K pop.

I like nada's point that there's no one-size-fits all answer.

However, renovations do follow fashion. A couple of years ago, the most cost-effective renovation you could do -- generally whether you had a house in the suburbs or a big apartment in the city -- was to make your master bath upscale, ideally with a separate bathtub and stall shower and double sinks.

However, the latest reno data indicates that the cost-effectiveness of that renovation is dropping significantly.

For that reason, if you're thinking about renovation, it makes sense to check in with someone who knows the market, whether it's your real estate agent or your contractor, and get an idea of what buyers are currently paying for.

ali r.
DG Neary Realty

> the latest reno data indicates that the cost-effectiveness of that renovation is dropping significantly.

where do you get that data ali? is it publicly available?

nada, loved the way you explained it, very intuitive!

Reno data comes from more than one place, so you have to watch it. Surveys come from Home Depot, Lowe's, Service Magic, Home Gain -- plus if you're on the real estate conference circuit, contractors come through and tell you what's hot.

If I were a civilian and I wanted to read just one thing, it would be Remodeling Magazine's Cost vs. Value report, which is annual.

ali r.
DG Neary Realty

Expanding on nada's point, the renovations have to be in line with the rest of the market, too.

If you spend $200k on renovating a small one bedroom apartment, you may only get a 50% return on your money even when it's shiny and new. On the other hand, if you put a cheapo $5k IKEA kitchen in a $1mm apartment, buyers may not value it any more than your old one. (I'd rather see older renovations done well and with quality materials, than newer ones with substandard materials or done poorly.)

Then there's the issue of the renovations being in line with the character of the apartment and/or building. Particularly with pre-wars, "vintage" well-done bathrooms stand the test of time and can actually be a source of value. E.g., we looked in London Terrace, Chelsea Gardens, and Chelsea Warren and were always thrilled we we came across a "gently touched" 1930s bathroom with the original wall and floor tiles. Most of the more modern bathrooms were not in keeping with the character of the buildings and had serious negative value for us. (I'd easily *deduct* $15-20k for a renovated bathroom in those buildings, versus a preserved old one.)

We ended up in an early 70s building, and I'm envious of the people in my building who still have the original turquoise, rust, and brown funky 1970s bathrooms. I'd pay good money to restore our all white, subway-tiled, 5-to-10 year old bathroom to that condition!

> Most of the more modern bathrooms were not in keeping with the character of the buildings and had serious negative value for us. (I'd easily *deduct* $15-20k for a renovated bathroom in those buildings, versus a preserved old one.)

great point! the need to "deduct" from the asking price is there not only cause the seller is adding it to his price but also cause it's going to cost to bring it to your liking.

In the bubble, return on renovations was more like 100%-500%. Add a $10k bathroom, sell for $50k more. It was called flipping !

"lad" is probably the exception, not the rule.

inonada nailed it. Even if they moved in before doing renovations, people will pay a premium to not have to go through the "nightmare" of renovations. Remember, these are NYC primadonnas. You think they can deal with dust and noise and dirty men in the apt for 3 months? And if they have a baby? Forget about it. Hell, they'll pay $100k to avoid that headache.

If you do a sensible renovation, under budget, renovations are a no-brainer.

Even in this economy, I've found that some sellers want a very high return on what they spent on renovations - sometimes the entire amount they claim was spent which can be a considerable amount of money. These apartments are often listed at significantly higher prices than other apartments in the same line. It can be difficult to justify the extra cost if you buy the apartment and end up needing to sell the apartment.

If I find an apartment that I really like, I try to see as many apartments as I can in the same building and, if possible, the same line. It helps me get a better sense of all the possibilities of an apartment and to determine which renovations/alternations are worth the cost.

Sometimes, oftentimes, it's a 'quality of life' situation, where the homeowner actually wants to enjoy the upgrading, renovating of their home. It makes them feel good, and that good feeling is vital, especially nowadays. Also, in terms of resale, people buy what they see. So, if your house is falling apart, they will walk in and walk right out. There are four major areas of increasing value to one's home: kitchens, baths, foyers, and master plans. Put those in place and you're set to go..

gegandco, that usually applies if you are planning to live there for a while, say at least 10 more years. In 10 years, your renovation isn't worth much anyway. Completely agree with ionada. If I'm going to buy a place that needs renovations, I'm looking for something that was last renovated as long ago as possible. It's amazing how sellers seem to think that a renovation still "counts" if it was done in 2000.