Choosing the right project

All that said, people who want to remodel would be smart to at least consider the potential payoff of their improvements before they begin. Like a car with good resale value, a home improvement project with some chance of a return is usually better than one that won’t add much value in buyers’ eyes -- or, worse yet, that could detract from the potential sale price.

Pools and spas are a losing proposition in many parts of the country, for example. The required maintenance and potential danger turn off many buyers, especially those with young children, real estate agents say. Adding a home office doesn’t seem to have much payoff either, returning as little as 26 cents on the dollar in some markets, according to the Remodeling survey.

Of course, if you really want that pool or state-of-the-art office, and you’re planning to live in your home for many years, the resale value might not matter much to you. But if, like most homeowners, you’ll be in your house for seven years or less, you might be wise to shelve your plans until you buy your ultimate dream home.

Think about improving your home's energy efficiency, as well. More efficient appliances, windows and light fixtures can pay for themselves within a relatively short time. So even if they don't add much to your home's resale value, you'll probably recoup your cost before you even put the house on the market.

How much is too much?

A better bet for a remodeling project would be any improvement or addition that brings your home up to the average for your neighborhood, said appraiser Diana Jacob, director of education for the National Association of Master Appraisers in San Antonio, Texas. If you have a two-bedroom home in a neighborhood where three is the norm, for example, a bedroom addition can make sense. Likewise, if your area is gentrifying, replacing your Kenmore appliances with Viking may not be overly indulgent -- as long as you see plenty of these higher-end stoves at your neighbors’ open houses.

If your home is already the envy of the neighborhood, however, you’re unlikely to get back much if anything on further improvements. Homes that are worth more than 120% of the neighborhood average typically don’t benefit much from renovations, appraisers say.

Homeowners also shouldn’t neglect their homes’ innards in their rush to improve its appearance. Major systems such as wiring and plumbing typically need updating after 20 years or so, as do many roofs and windows, Jacob said. Money spent upgrading these components might not offer a dollar-for-dollar return at sale time, but neglect and deferred maintenance can detract from a home’s potential sale price and add to the time it spends on the market.

Excerpt from: MoneyMatters 12/30/03