Case Study Home Renovation or Sell for Land Value in Houston
One of the most common questions we receive is should we renovate our older home or should we just live in it until we want to sell our home for land value. This is a excellent question to deliberate and should be carefully evaluated before any major investment is undertaken. There are many factors that require in-depth dissecting and careful analysis in order to make a qualified determination.
We have an interesting and telling case
study that occurred in the City of Houston, Memorial Area. The Memorial Area is
a desirable affluent area of Houston that is near in, great school districts
and a high demand area to raise a family. Our case study involves the story of
2 quite similar homes on comparable sized lots, approximate sized homes and
both parallel soft modern architectural style homes in the same neighborhood.
Each owner had very different objectives and housing needs. One property owner
decided to do the minimum home improvements of product replacement, while the
other property owner incorporated product replacements into several phased
major home renovation projects over the course of 2 years.
Back Story Financial Data
Data Smith
Family Jones Family
Purchase Price $440,000 $440,000
Year Built
1958
1960
A/C - S/F
4,020
4,200
Lot - S/F
24,000
29,000
Addition - S/F 0 1,420
Improvement Cost $ 85,000 $350,000
Sales Price
$940,000 $1,
820,000
Net ROI
66% 98%
Back Story
Both families purchased their homes
within 2 years of each other and sold their properties within 2 years. The
Smith's elected to live in their home for a period of 8 years without any major
home improvements. The only improvements that the Smith's were forced to make
were home component replacements such as kitchen appliances, HVAC equipment and
general home maintenance and repairs.
The Jones's elected to do a whole home
renovation and expand the overall envelope of the home by 1,420 sf. These home
additions included expanding the kitchen by 200 sf and extending a portion of
the front 180 sf to create a foyer, formal powder room and some additional
storage. The remaining home addition was for a new master suite which included
a large bedroom, walk-in closets, exercise area and master bath.
The project also involved taking the
home back to the studs and refinishing. A TPO roof was added as the new
additions were framed. New HVAC components and new electrical panels were added
to increase the required electrical demands and wood & stone floors were
used throughout the home and a cover summer kitchen was created at the end of
the project.
Personal Goals &
Objectives
The Smith family consisted of two middle
aged empty nesters with one child in college. Both owners were professionals
and had an annual income north of $150,000. There lifestyle was modest and they
did not entertain or have large family gatherings often. They did travel abroad
several times a year but at the expense of his company.
The Jones family had 2 children
remaining at home. One was in college and the other was in high school. The
owners consisted of two middle aged adults, one was a professional and the
other a stay at home mother. There annual income was also $150,000 annually.
Although their lifestyle was dramatically different, including frequent large
family gatherings, numerous out of town guest and entertained regularly.
The personal goals of the buyer / owner
will always require to be taken into consideration when evaluating to make home
improvements or hold out for land value in a future sale. The home should
reflect the quality of life that the owner is most comfortable with.
Types of Improvements
There are many different home
improvements to consider when evaluating your property for investment. These
improvements can be categorized in two distinctive groups, replacement product
improvements and discretionary lifestyle improvements.
Replacement products are the home
components that have exhausted their serve life or become obsolete. These are
items such as kitchen appliances, roof membranes, exterior & interior
paint, HVAC systems.
Discretionary improvements are products
and home improvement products / services that replace components for the
purpose of updating the home design and decor regardless if it still provides
its primary function. Hence the name discretionary improvements. These items
include such items as flooring, cabinetry, counter tops and plumbing fixtures.
The ideal home renovation includes the
strategic planning of product replacement products with the overall scheme of
the renovation design and the discretionary improvements. Incorporating both
types of replacement products is by far the most efficient method to plan and
execute the design and construction improvements into home renovation.
Determining Factors
A collective evolution and full analysis
is the only way to secure a proper answer to the question of implementing a
home improvement strategy or to hold the property for a sale for land value at
a future date. It is only after a complete analysis of the following
determining factors can one make a high confident decision. The careful
assessment of the following vital factors should be weighed and measured.
Location- As with any real estate transaction the location contributes
enormously to the market value of the property. The location also drives the
rate of price appreciation over time. These factors can be appraised by
studying the sold property values over the last 5 years. Caution should be used
not to use only short term sales pricing, for this may only represent short
pricing trend burst in concentrated local areas.
Time Period - The length of time that the owner intends to hold the property also
has a contributing effect on the expected return of the owners investment.
Shorter holding time durations are highly speculative if the property is
intended for flipping for land value. There is much less risk if you are
holding for short periods if you are employing a home renovation strategy. The
supply and demand for both new home building sites and trending older home
sales should be monitored for sudden market changes.
Economic Cycles - The residential single family housing market, much like the economy
is cyclical in nature. These cycles are difficult to predict short term
directions and should be referred to for establishing economic patterns to
confirm impacts on the immediate employed strategies. Timing the market for
sale is highly a speculative venture and does not hold the promise of the
desired outcome.
Lot Value - The gathering of sold local lot prices and current available inventory
is another critical element that is required to enter into the decision making
process. Due to the lack of available lot supply in metro Houston, most
building site availability is the result of purchasing obsolete and dilapidated
homes ready for demolition. These homes are often sold for in a "as
is" condition. Careful consideration should be used when assessing the trending
lot prices to determine the relative supply of like kind lots at the sales
time.
Home Component
Evaluation - A complete and vigilant home inspection
should be conducted to determined the product replacement requirements. These
products will justify and establish a base line renovation budget for assessing
the construction cost requirements. These products are not required to be in a
non-operating condition. Evaluating the present condition and expected service
life will provide enough information to determine if these components deem
replacement.
Financial Feasibility - The financial feasibility is an assessment and analysis of the all
the relevant factors that have a direct impact on the property's value. Once
the pre-mentioned critical factors have been collected, they can be entered
into the financial feasibility. These factors are implemented in many different
analysis, such as cost to benefits analysis, buy sell analysis, renovation cost
analysis and market value analysis. The collective studies can be implemented
to determine the risk and returns from the investment required for the subject
property.
Summary
In our case study both the Smith and
Jones experienced solid growth and returns on their equity and investments for
their home acquisition and sales transaction. The results outperformed most
other investments available during this period of time. This is a reflection of
both the Houston housing market and local Memorial market value appreciation as
well.
In comparing the two subject properties,
the Jones investment results from the home renovation efforts produced a much
more favorable return then the Smith's transaction. The Jones return on
investment results were nearly double those of the Smith's property during like
circumstances and conditions. One could safely expect similar financial
performance provided that the conditions were comparable.
This case study represents a very over
overlooked home purchasing strategy. It is not widely embraced for a number of
reasons. First it takes a great deal of time and effort to conduct the required
due diligence and home renovation improvements. Secondly it requires a number
of very specific skills to perform the required assessment and analysis. An
effective method of achieving these results if you do not have these abilities
is to hire a seasoned luxury home remodeling contractor to assist you in these
technical tasks.
The results are undeniable, but require
the seasoned skills and effective leadership to succeed.
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