I wish there really were a secret formula to determine how much to spend on a renovation. We have systems that help, but each house is different. As you probably get tired of hearing me say, “It depends on what you want….”
The Secret Formula
We all want to get the most out of our renovation dollar.
A friend of Sue Ann’s recently sent us a couple of questions. Since these questions came from a real person, I’m going to answer in the second person. You know. Like I’m really talking to you or something. And I’m going to assume the backstory.
Is there any kind of equation for how much money one should put into fixing up a house before selling it? Like 10% of the price you hope to get for the house?
Sorry, no.
We do have a formula we use to determine how much we can safely pay for a house, and that’s no secret. We start with 70% of the estimated value of the house after repairs. Then we subtract the estimated cost of those repairs to get our purchase price. With this formula, we know what we can afford to pay for the house. The 30% we take off the top covers things like taxes, utilities, interest, other holding costs, commissions, marketing, closing costs (on both ends of the transaction), and our hoped-for profit. People often forget that there is more to figuring profit on a renovation than subtracting the renovation costs and purchase price from the sale price.
Kitchens, like this one at our Parkwood project, sell houses, but you can overdo them. For example, I can’t think of a time when you’d want to put a kitchen like the Parkwood kitchen into a starter house.
It boils down to a simple rule: Don’t spend any money you can’t get back.
Since you already own the house you’re asking about, figuring out what to spend is a lot more work. You have to take each item on your list and get estimates of how much it will cost and how much value it will add. Each item will be a personal decision on whether you think it is worth doing or not. Your Realtor® can tell you how much value an item adds, and your contractors can estimate the cost of doing it.
When Sue Ann and I sold our Braesgate house, we had already done many improvements over the years we lived there. We also knew that some buyers want a house already done, while others will redo it to suit their tastes regardless.
When we put pencil to paper, we decided that the remaining improvements would not add anything to our bottom line. So, we sold the house for market value less the cost of the renovation. We made the same amount of money without having to do (or live through) the final renovation. And the buyer got to fix up the house the way they wanted it. Win-Win!
Sue Ann’s friend actually asked us more than one question. I hope you look forward to the rest of this series.
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