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Fixing Up A Home To Increase It’s Resale Value
Buying old properties is always a good value play if the deal is right. They are aesthetically less pleasant to the eye. Maybe even practically less appealing. This results to subdued demand and quite possibly a good price if you play your aces right. Although it can look like a killer deal on the surface, you also have to be mindful what you are getting into. The key to getting it right is to have the ability to quickly know what can be fixed at a good price that will have the biggest upside on property value.
Even though there are certain items that are generally perceived as appreciation power boosters, always remember that every home is different. Unlike stocks where every common stock is the same, every home is different. So there cannot be a sure-win formula that applies to each property. Property age, layout, location and legal restrictions and among the many factors that affect what you can do to the property.
Remodeling areas like the kitchen and adding additional rooms will usually increase value. But if your intention is to rent out the place to tenants, increasing livable space will intuitively make the property more enticing. For example, some people knock down store rooms to increase the size of living areas. If you have the opportunity to build up the place from scratch, minimize the parking area and maximize the number of rooms.
Generally speaking, adding pools, patios, landscaping, fancy flooring does not increase a lot of value unless a buyer or tenants has these specific interest. If you think that these renovations will undoubtedly give your property an injection of appreciation steroids, you could be letting your emotions get the better of you. You might think that you are making the place more attractive and conducive for tenants and buyers. But tenants usually do not care about these gimmicks. Tenants just want a comfortable place to live in and buyers usually have design ideas of their own to implement.
Spending premium money on branded appliances is also unnecessary spending. Your tenants is generally not going to care whether the television set is Samsung or Akira. The same goes with the washing machine, refrigerator, water heater, air-conditioning, etc. For example, if the air-conditioning for the property is not working anymore. Replacing it with a branded designer compressor unit with extended warranty won’t get you a higher offer when a potential buyer comes visiting. A buyer could even be looking at a full scale renovation that requires custom setups of air-conditioning.
The takeaway point is that when something is not working that requires fixing or replacing, go for practicality unless what you are going to do will increase the market value or perceived value of the house.
Market value vs perceived value
The appraised value of a property is best used as a benchmark by both buyer and seller. Buyers use it as a mean of negotiation when appraised value is lower than asking price. While sellers use it to get a better price when appraised value is high than a buyer’s offer price. Although professional valuers are the ones providing estimates of appraised value, properties seldom transact at valuation price. It is with this data that appraised value should only be used as a guide or reference point instead of something concrete. Different valuers may also value a property very differently. And when you transact at a price higher than appraised value, the appraised value often magically increase to match the transaction price. Talk about natural phenomenon… This is why real estate investing is more of an art rather than a science.
If we take for example that you decide to build a marble kitchen bar for $5,000 which will increase the property value by a mere $1,000, people are going to ask you whether it is logical to do that. But what if it increases the buyer’s perception of value by $10,000? Will it be worth it now? Valuers approach valuation in a more technical way while buyers are more emotional. And since a valuer is not buying your property, buyers are the ones you want to target, unless you need a high appraised value for a home equity loan. That is a whole other topic for another day. If a buyer agree on a good price for your house, more often than not, valuers will match that with value unless we are talking about a radical price that will put your name in the local newspapers.
Since appraisers use neighbourhood prices as a reference, your new property market value after renovations will be compared to those of your neighbours. This is a critical reason why it is a better deal to buy the worst property in a good neighbourhood. There is a value ceiling that valuers will attempt to compare with and close the gap on. Whereas if you buy a best home in the neighbourhood, most people will be reluctant to give it a justified higher value as there is no upside reference to compare with.
Play with lighting, mirrors among others . Be smart with renovations. Take a cue from show flats of the many new launch condominiums sprouting up all over Singapore. Down lights and feature walls can give a huge boost to perceived value even though the costs of fixing them up is not that much.
Flooring and tiles. When you are replacing the flooring, consider spending a little extra for better tiles. These are things that can totally change the atmosphere of a home. Laying down premium tiling for kitchen and bathroom floors is not really that expensive. If your bathroom is 150 square feet and normal tiles cost $5 a piece, a premium quality tile at $8 a piece only costs you an extra $450. But the perceived value of your home can go up significantly.
Setting a goal. Even before you go about with your remodeling, you must have an idea how you want it to turn out. If you take a look at the best house in the neighbourhood, you might want to directly challenge it with outrageous designs that make your home look like a royal mansion. But remember that even if you match up to the best in the neighbourhood, will you be able to get the same rental or price as your competition? If not, matching up to them is not a clever move.
Focus on using small money to maximize perceived value. Use median homes in the neighbourhood as a design benchmark instead. Set aside a budget of between 5% to 10% of your purchase price for remodeling and target an increase in property value of at least double your remodeling budget.