Repairs and Renovations may Lead to Other Necessary Costs

One of the biggest problems that many homeowners run into when they begin repair or renovation projects is underlying costs. In many cases, one thing leads to another; you may plan a bathroom renovation, for example, but then discover that the sub-floor and plumbing in your bathroom needs to be replaced once the contractors start tearing things up.

Things like wiring and plumbing upgrades or improvements are the biggest expenses that homeowners fail to anticipate when planning a simple renovations. However, sub-par construction, termites, mold and other problems that aren’t visible on the surface can lead to big costs once you get into a project.

Get a Full Picture Before You Begin a Project

The single most important thing you can do when you’re thinking about doing renovations or home improvements is to get a full picture of what’s involved before you begin a project. Have the contractors actually come to your home to provide you an estimate. Research the most likely problems and how much they could cost before you begin your project.

Get estimates from multiple contractors, and it may be worthwhile to have an electrician or plumber come to inspect your home before you begin a major project. Getting an accurate idea of your costs isn’t always possible, but the more information you have, the better you can plan for the true costs of your “simple” improvement project

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Think that comparable sales tell you everything you need to know about the current real estate market? Think again. Economic factors aside, real estate markets tend to operate in boom-bust cycles. If you buy at the end of the boom, you’ll be faced with a long period of softening real estate market and potentially falling home prices. The key to making a good investment in real estate is to predict where market values are heading – not just where they currently stand. To do that, take a look at how much it costs to build your home.  

The Cost to Build can Signal Market Activity

Real estate markets are very delicate economic ecosystems. When property values are good and rising, builders want to build more homes to capitalize on the potential profit. As builders create more homes, increased supply can soften the market. This can cause home sales to stall, and may even cause home values to fall. Combined with economy troubles, a softening real estate market can leave you with a home you simply can’t sell.

To figure out where you are in the cycle, look at how much it costs to build homes that are comparable to the home you’re thinking of buying. If the home you’re buying costs $140,000, and it only costs around $110,000 to build it, you might be paying too much for your home. It either signals that there’s a lot of room for profit in comparable homes, in which case builders are going to cash in on it and your market could soften, or your home is overpriced to begin with.

Ideally, you want to look for home values that are within 10 percent of what it would cost to build your home. That signals that there’s still room for growth, but it’s not likely to cause a saturated market that could ultimately hurt you long-term.

Remodeling can be a great way to improve your property’s value and make a quick buck when you sell your home. Buying a “fixer upper” home is one of the classic home buying techniques for first time buyers who may not have a lot of cash and resources up front, but hope to build resources through homeownership to move up to a better home. Before you put in an offer on that home you plan to remodel, though, do your homework. Over- or under-improving your home can have the opposite effect and lose you money in the deal.  

Beware of Over-Improving

Over-improving a home is a classic mistake that many new homebuyers make. They buy a home in a neighborhood where property values are relatively low, and make a ton of improvements on the home to make it stand out. Unfortunately, you can only raise a home’s value so much through home improvement. The value must still fit in with the neighborhood or people simply won’t pay enough to justify the extra work you put in.

If you buy a $130,000 home and put $30,000 in improvements, you’re going to have trouble selling a $160,000 home in a neighborhood where most of the homes are valued at $115,000. Find out about the neighborhood and comparable properties before you start remodeling.

Under-Improving can be Just as Bad

Under-improving a lot can be just as bad as over-improving. Consider buying a ranch home for $140,000 in a neighborhood full of two-story homes valued at $300,000. No matter how much you improve the ranch home, it’ll be out of place in the home full of two-story, $300,000 homes. The next buyer might come along and knock your ranch home down to build a two-story home more appropriate to the neighborhood. When you plan to remodel, make sure the property you buy fits into the neighborhood and can support the changes you make.

With our society becoming increasingly focused on environmental impact, there’s a growing segment in the real estate housing market – green real estate. “Green” real estate is property that has had modifications or changes to make it more environmentally friendly.  

Green real estate includes things like alternate energy sources, energy-efficient appliances and even things like better insulation to conserve energy. New “green” homes are built with environmentally-friendly building materials, and may be built in areas that make the homes themselves more efficient. For example, a “green” home may be built into the side of a hill to conserve energy and maximize insulating properties.

Green property isn’t just for environmentally-conscious individuals. Eco-friendly real estate has practical benefits for homeowners. For example, if your property includes energy-efficient appliances and low-flow plumbing fixtures, you can save substantial costs on utility and water bills every month. If you’ve got an alternate energy source, you can use less electricity, thus lowering your energy bills. Some alternate energy sources also generate excess electricity that you can “sell back” to the utility company, in the form of a credit on your bill for electricity that you do use.

The government is getting on board with “green” housing, too. When you invest in some alternate energy sources, the government offers tax credits and write-offs that can cover a portion of the cost or the entire cost for your alternate energy sources.

For example, through the end of December 2010, you may qualify for “Federal Tax Credits for Energy Efficiency” to offset the costs of installing energy efficient doors, windows, insulation, heating and cooling. Solar energy systems may qualify for a 30% tax credit if installed before December 2016. For detailed information on tax credits, check with the U.S. Department of Energy.

Being “green” isn’t inconvenient and something to consider just to be a “good citizen.” Going green with your property also has real financial benefits, in addition to being good for the environment. If you’re considering buying a home, look for homes with some green features to offset your living expenses and housing costs. If you’re selling a home, think about installing energy-efficient appliances or switching to “green” building materials. It’s a great selling point, and you can get tax credits for some of those improvements!

When you buy a home, the goal is always for the home’s value to appreciate so you make money if you sell it in the future. However, if your home’s value does increase, you’ll have to pay taxes on your capital gains based on the profit you realize from your home sale. If you save receipts for your home improvements, you can deduct those costs from your capital gains and pay less in taxes when you sell your home.  

How to Calculate Capital Gains

Your capital gains when you sell a home are essentially any money you made from the home sale. For example, if you buy your home for $150,000, and sell it for $200,000, you’ll have to pay capital gains taxes on the $50,000 profit you made from your home’s sale.

How Home Improvements can Help You Save

When you make capital improvements to your home that permanently increases its value and useful life, you can add that value to your purchase price to determine your cost basis for the home. For example, if you pay $10,000 to replace the roof of your home, that’s an improvement that permanently increases the home’s value and useful life, so you can add that to your home’s cost for determining capital gains. So if you bought your home for $150,000, and paid $10,000 to replace the roof, your home’s cost basis becomes $160,000. When you sell your home for $200,000, you only have to pay capital gains taxes on $40,000.

Only improvements that permanently increase your home’s value and useful life count toward your cost basis. If you perform routine maintenance, such as patching the roof, fixing a leaky pipe or replacing broken windows, those costs do not count as capital improvements. Keep receipts for all of your capital improvements so you can document your cost basis and save money on capital gains when  you sell your home.

You can get a great deal on a home even if you pay fair market value: find ways to add value to your property. When you’re shopping for a home, look for a few factors that enable you to make small or inexpensive changes that can make a big difference in your property values. This can be the difference between paying a fair price for a home, and getting the deal of a lifetime.  

Look for homes that would benefit from minor cosmetic changes.

Some homeowners simply don’t take the trouble to make minor cosmetic changes that would make a big difference in a property. Look for properties that would benefit from new carpet, a fresh coat of paint on the walls or some landscaping upgrades to the yard. You may be able to make these minor cosmetic changes on a low budget, but they can make a big difference in the ultimate resale appeal and value of your new home.

Make an accurate estimate of what cosmetic changes would cost.

Some projects cost more than you’d expect when you start out, so if you’re buying a home with an eye to fixing it up, make sure you make an accurate estimate of what these cosmetic changes would cost.

If you’ve got friends in construction or home improvement, find out what they’d charge for your proposed projects. Go to a home improvement store and price things out, and make sure you know how much you’d spend for your ‘minor’ projects. There’s a point when the cost outweighs the value of an upgrade, so be careful not to get into a money sink when you buy a fixer-upper.

Consider cosmetic defects as a way to get a better deal.

Most homeowners are aware of cosmetic defects to the home before they try to sell. Real estate agents advise homeowners on things they could improve, so many of your suggestions won’t come as a surprise to homeowners. See if you can get sellers to come down in price relative to the cosmetic changes you want to make. In some cases, you can use this as a bargaining chip to get an even better deal.

When you own a home, a time may come when you decide to make home improvements. You might buy a new home with home improvements in mind for the future, or you may plan home improvements when you have an unexpected windfall or a life change. Regardless of your reason for making home improvements, don’t look at them as a massive expense; home improvements can be a very good thing. 

Home improvements enhance your property value

While home improvements cost money up front, they also enhance your property value. If you add an extra bedroom to your home, for example, you might spend $7,000, but you might boost your home’s value by $5,000 or $10,000. Check out comparable properties in your area to determine how much you’ll boost your home’s value by adding certain improvements. Keep in mind, though, that when you boost your home’s value through home improvements, you may also face increased tax assessments that cost you more in property taxes throughout the year.

Home improvements can boost your resale potential

Home improvements don’t just boost your property values; they can make a big difference in your resale potential. If you add a bedroom to a two bedroom home, for example, making it a three bedroom home, you’ll expand your potential buying audience to people with multiple kids or people looking for a home office and a child’s room. Adding certain home improvements can make a big difference in your resale potential.

Home improvements confer tax advantages

Finally, the IRS gives you credit for home improvements when you sell your home. When you sell a home, you typically have to pay taxes on any income you’ve made, so if you turn a profit, you may have to pay the government on that profit. However, if you’ve made home improvements, you can typically deduct that value from your home sale price, and reduce the amount on which you’d have to pay taxes. Consult a tax professional for details, but home improvements can confer tax advantages.