Money is turning 50! To celebrate, we’ve combed through decades of our print magazines to uncover hidden gems, fascinating stories and vintage personal finance tips that have (surprisingly) withstood the test of time. Throughout 2022, we’ll be sharing our favorite finds in Money Classic, a special limited-edition newsletter that goes out twice a month.
This excerpt, featured in the 14th issue of Money Classic, comes from a story in our January 1973 edition.
Editor's note: This story includes language that isn't inclusive. Preferred language is always evolving, and Money is committed to writing stories that do not discriminate on the basis of race, color, sex (including gender identity and sexual orientation), religion, age or disability.
Two houses on a pleasant block in Holyoke, Mass., were sold within the past three years. They were similar in age, style and size, but one had a large backyard swimming pool and a finished third floor with bedroom and bath. So the house with pool brought top dollar compared with its unimproved neighbor, right?
Wrong. Mr. and Mrs. Francis T. Martin Jr. bought the house with the pool for $30,500. Twenty months later, Mr. and Mrs. John E. Dowd paid $38,000 for their house, which, like the Martins', has five bedrooms and two and a half baths, but no pool and an unfinished third floor. "When we bought the house we never even saw the pool," Mrs. Martin said. "It was covered with snow." Mrs. Dowd said she and her husband were attracted by the spacious rooms of their house and by the neighborhood.
The experience of the two Holyoke families is not unusual. Many homeowners incorrectly assume that the money they spend on improvements will be returned, perhaps even with a profit, when they sell the house. In fact, that is rarely true. On average, a dollar spent on remodeling adds only about 50 cents to the resale price of the house. Some improvements add nothing at all.
"Adding onto an old house is very expensive, and the costs are not fully recoverable," says Richard A. Bowler, a Holyoke appraiser with a national reputation in his field. "The best buck you can spend is on a newer house with the space and amenities you're seeking." Bowler's opinion is shared by many experts, including Milton J. Francis, director of the appraisal and mortgage risk division of the U.S. Department of Housing and Urban Development. For the family wishing to improve its housing in the most economical way, Bowler and Francis have a simple recommendation: move.
Still, Americans spent $7.4 billion last year on home improvements, and it would be wrong to judge that money ill spent. Most people improve their houses for reasons of comfort, convenience and status, not as an investment. Unlike most new houses, an improvement can be tailored to your needs. Moreover, staying in a choice location instead of moving elsewhere may more than justify the high cost of remodeling, and no beady-eyed appraiser can put a dollar sign on your personal taste or satisfaction.
That is not to say that improvements have no resale value. But the family that considers home improvement partly as an investment in the eventual sale should proceed carefully. By adjusting your personal preferences to those of the marketplace, you can make improvements that increase your comfort without costing you a heavy penalty when the house is sold. Appraisers, contractors and real estate agents generally agree on four axioms that everyone should consider before remodeling:
1. The quality of the neighborhood is by far the most important factor in the sale price of your house. If the average neighborhood price is $35,000 and your house cost you $30,000, you may recoup most of a $5,000 remodeling job. But $10,000 worth of improvements would not be such a good investment because the buyer seeking a $40,000 house will be looking in a neighborhood of $40,000 houses. That does not mean you can let your house deteriorate, expecting neighborhood values to sell it for you. A rundown house in any neighborhood tends to sit on the market, as unwanted as the fat kid on the block basketball team.
2. An improvement should be appropriate to the house and the neighborhood. Wallace W. Kidwell, vice president of Thomas J. Owen & Son, Inc., a leading appraisal firm in Washington, D.C., says homeowners often overlook this point. "People go bananas," Kidwell says. "In a $30,000 or $40,000 house, they'll put in a kitchen that fits a $70,000 house. The improvement should fit the house in a degree of luxury." It also should fit the neighborhood architectural style, no matter how plain. An avant-garde addition may win an architectural medal, but in a neighborhood of ordinary split levels it may bring less on resale than would a more conventional design.
3. With few exceptions, any improvement costs more than it would have had it been built into the house at the start. Compared with original construction, an added room costs about twice as much per square foot. Even remodeling jobs done within the existing walls exact a premium. If you convert a bedroom niche into a bathroom, it will cost about half again as much it would have to install that bath when the house was built. Remodeling a kitchen or adding a fireplace costs at least 20% more than doing the same job as part of the original construction. The eventual buyer of the house, of course, will not pay that premium; to him, a room is a room. Indeed, if your improvement is not carefully designed, it may produce an odd floor plan that will make your return on investment even smaller than it would have been otherwise. If you add a family room for $8,000, you can presume it would have cost of original builder of your house only $4,000. Unpleasant as it may be to take a 50% loss, if that room adds $4,000 to the sale price of your house, you have done as well as you can expect. Converting a porch or breezeway into a family room costs about 40% less than building the same room from scratch and will probably yield the same price on resale; it is thus a better investments. Of course, the margin of loss can be cut drastically, or even eliminated, if you make an improvement yourself. But do it well, because a shoddy do-it-yourself job may cut the price of your house by the amount it would cost to do it over again professionally.
Experts agree that there are several reasons why home improvements cost so much more than original construction. John J. Heyn, a former builder, is now president of the National Home Inspection Service, a firm that checks out for prospective buyers how well a house is constructed. He says that because remodeling contracts are for much smaller amounts than house-building contracts, remodelers usually get a 100% markup while a contractor building a house gets only 10% to 20%. There are other factors. Often a contractor must bid on a room addition, for example, without knowing what hidden pipes, wiring or masonry he may run into a wall that must be removed. So he will bid high, just to be safe. If you known your house thoroughly, inside and out, you may get a lower bid by guaranteeing in advance that the job will not require major changes in plumbing or wiring. Many contractors also add a bit to their bid to inconvenience of having to work while you and your family are in residence. You may save something by agreeing to take your vacation while the job is being completed, if you know the contractor well enough to trust him in your house while you are away. But stay in touch, because if the contractor encounters an unwanted problem he may be able to deal with it relatively cheaply if you will agree to modify your specifications.
4. The more visible an improvement, the more likely it is to increase the value of the house. "The way a house looks when a buyer walks in is usually what sells it," says Ann Brehm, a real estate broker in Scarsdale, New York. "Most people go by the surface." As a result, some substantial but prosaic improvements add virtually nothing to the sale price: replacing galvanized water pipes with copper, for example, or boosting the electrical wiring capacity. Even so, there is also little return on some visible exterior improvements, like adding storm windows, applying aluminum siding or replacing an asphalt roof with tile or cedar shingles. The average buyer expects a house to have windows, siding and a roof and is unlikely to pay extra for high quality. Appraisers have difficulty accounting for this reluctance, since storm windows reduce heating bills and aluminum siding saves on maintenance, but they agree that it is is the rule.
Wisely or not, the average buyer considers installations of this kind maintenance, not improvement. Experts agree that maintenance is important to the resale price, but only to keep it from dropping below the neighborhood norm. If the exterior paint is peeling, you may be penalized $1,000 or so on resale. An aluminum or vinyl siding job costs three to four times as much as repainting, but it does little more to keep up the resale price. So a siding job is worthwhile only if you stay put long enough to benefit from the saving on maintenance. Do not expect the buyer to pay you the money he will save by not painting every few years.
Subscribe to Money Classic.