House Wreck: Home Investment Mistakes

backyard swimming pool (Photo credit: Wikipedia)

When it comes to home renovation, there are two schools of thought. In the first, homeowners make changes that make their homes more livable and personally appealing without worrying about how those changes affect the value of the house. In the second school of thought, all changes are made with an eye toward how they will affect the home's value. If you fall into the category, or simply worry about how renovations will affect your home's value, then be sure to avoid the following costly mistakes.

Overbuilding

This is the most common mistake that homeowners make when trying to improve value. Before you make too many improvements, you have to consider how your home compares to all of the rest in the houses in your neighborhood. There are two important reasons why you must make this appraisal.

The first reason for considering the value of homes in your neighborhood is because real estate managers, like Kevin Kerekes, will use the value of those homes to help determine the value of yours. This is called the "comparable sales method," and it uses information about recent, nearby sales to determine how your home stacks up. This means that your house may be worth more or less depending on the neighborhood in which it is found. The bottom line is that this method puts a kind of upper limit on how much a home can sell for based on its location. No matter how many improvements are made, the value just won't go up by much.

The second reason that neighborhood is so important in determining home value is that like-minded people tend to want to live together. That means that people who shop in your neighborhood probably like the look and feel of it. If you have bucked that trend you not only won't get any interest from people who like your neighborhood but not your house, you also won't get much interest from people who like your house but not your neighborhood.

Landscaping

A little landscaping is a good thing, but too much can turn a potential buyer off. The best way to think about landscape is as curb appeal. It should encourage people to take a closer look at your home, but it shouldn't be the major selling point. What is more, extensive landscaping can be a turn off because most people aren't interested in maintaining it.

Swimming Pools

Swimming pools are a personal preference. Some people like them, but they generally won't increase your home's value much. They certainly won't increase the value enough to offset the cost of installing the pool. The reason pools are not selling points comes down to insurance and maintenance.

Pools are dangerous. To many people they are an accident, or a lawsuit, waiting to happen. Insurance companies are well aware of the danger that pools pose and they compensate for that danger with higher premiums.

Beyond insurance costs, pools are also maintenance headaches, requiring the use of chemicals and eating up time that could be spent doing other things. The costs of maintenance, when added to the costs of insurance, are enough to explain why many potential buyers actually make their purchase contingent on removal of a pool. Most people don't get enough use out of a pool to justify the high costs associated with them.

Carpet

Like landscaping, carpet is a thing people can appreciate in moderation, but quickly come to hate when it is used to excess. Wall-to-wall carpeting is a major turnoff for buyers because it is hard to keep clean, wreaks havoc with allergies, needs to be replaced much sooner than other coverings, and is generally perceived as being "dated" no matter how new it is. Hardwood, tile, and even linoleum are better investments than carpet.

High-End Mismatch

High-end appliances and fixtures can really increase the value of your home, but not when they are paired with mid-range flooring or an average house. In general, functionality will trump fashion in the real estate market every time, so it is better to go for a fully functional home than one that has a fancy stove but could use some TLC otherwise. The general rule is to void upgrading odds and ends in several rooms and instead focus on a full upgrade for a single room. Bathroom and kitchen remodels are most likely to have a positive impact on home value and benefit from higher-end items.

The Bottom Line

When planning a home renovation, first decide if you are doing it for personal enjoyment or for financial gain. If it is the latter, then you need to do your homework. Find out what houses in your neighborhood are like and look into what features sell. In some cases you may find that renovations won't do anything to help increase the value of your home. In those cases, you can dodge an expensive bullet just by doing a little reconnaissance. Remember to research before renovating to avoid the costly mistakes discussed above.

Kevin Kerekes writes about baseball, real estate, motivation, and urban development. Read his blog, which focuses on the State of New Jersey, baseball, and investing.