If you're a homeowner planning at least a modest remodeling of your property, you're part of what could be a record-breaking phenomenon: a $60 billion rehab boom this year that has contractors, suppliers and lenders working overtime in major markets across the country.
Relatively favorable interest rates and terms for refinancings and second mortgages -- plus a recognition that rehab is the only dependable way to create real estate value in a low-inflation economy -- are propelling the surge.
Not all improvements build value equally, however. Dollar for dollar, some are positive disasters for owners looking for high-yielding capital paybacks. Others create $2 to $3 in resale value for every $1 you sink into them. Here are some ground rules for getting maximum real-capital impact out of rehab projects planned for 1985, based on discussions with appraisers and mortgage lenders active in the rehab market.
Rule Number One: Keep your project in scale with your neighborhood's real estate norms. If you live in a community with $80,000 to $100,000 homes, you'll never get back the money you spend on a knock-em-dead, high-tech gourmet kitchen whose $40,000 cost is more typical of neighborhoods with $250,000 to $300,000 homes. Future buyers and financers of your house may admire your gleaming equipment. They may wish they were your dinner guests. But they won't pay you $40,000 extra for your kitchen. Half of that amount -- or less -- is more likely.
Rule Number Two: Invest in the types of improvements that will have the most practical, immediate use to the major category of households moving into your neighborhood. If younger families with small kids are the predominant buyers, turning the side porch into a recreation room or adding a first-floor bathroom should provide high-ratio paybacks. By comparison, spending the same amount of money on heavy-duty landscaping won't be translated into equity dollars as readily. The landscaping will add value, no question, but your likely buyers won't pay dollar-for-dollar for it. Rule Number Three: Acquaint yourself with recent trends in paybacks for different types of improvements. One of the best annual surveys is by New Shelter magazine, published by Rodale Press.
Rodale's 1985 study computes cost-value ratios for 14 major remodeling projects undertaken on an "average American home" -- a 17-year-old, three-bedroom, 1,600-square-foot, $90,000 unit in a midwestern suburb. The study used actual bids from contractors, and then assessed their relative effects on resale values and on "financing" values -- the extra amounts that bankers would lend on the property following its upgrading. The results for 1985 were eye-opening in a number of categories:
* Adding insulation to sharply increase the energy efficiency of your house yields 17 percent less in resale payback than it did in l982. But $1,200 worth of insulation still adds $1,000 (83 percent of cost) to the resale value of your property and $900 (75 percent of cost) to its equity-financing value in the eyes of a mortgage lender.
* Adding a full, new bathroom to an existing home's floor plan is near the top of the cost-value hit parade (103 percent of cost added to resale value, 130 percent of cost in mortgage-financing terms). Remodeling a bathroom you already have, by contrast, doesn't yield as well. A $4,900 "complete remodeling" with new fixtures, ceramic-tile wall and flooring produced only 51 percent of cost in added resale value and 45 percent of cost in mortgage value.
* Kitchen remodelings tend to perform well, but smaller, more modest projects in the $4,000 to $7,700 range (for the $90,000 test house) yielded significantly higher returns than major overhauls ($7,400 to $24,500 for the test house). Smaller projects produced resale and mortgage-financing returns of 86 percent and 83 percent respectively. Major remodelings, on the other hand, yielded 79 percent for resale and just 60 percent for mortgage financing.
* Skylights are a splendid way to open your home to the great outdoors, but they're only so-so performers when it comes to resale value (adding only 60 percent of cost). Swimming pools are considerably worse: Except in areas of the Southwest where they're in everyone's back yard, they yield only 25 cents on the dollar on your mortgage lender's ledger.
* New fireplaces, by contrast, more than pay for themselves in most parts of the country. Spend $3,100 warming your hearth with a new six-foot-wide fireplace and mantle, and you'll add $4,000 to your home's resale price, according to the value study.