Over Improving Property: What it Means and Why You Should Avoid It – Motley Fool

As a homeowner or investor, it's easy to want to upgrade and improve your home to the highest possible quality and standard. It only seems logical that using the best materials, finest finishes, or top-of-the-line upgrades should get you the most bang for your buck. But in reality, some renovations won't justify the cost when it comes time to sell.

Whether you're a homeowner doing some home upgrades or an investor rehabbing an investment property, learn what it means to over-improve a property and ways to avoid it.

Over improving a property means the total cost of the improvements exceeds the value the improvements add to the underlying property value. Essentially, the property owner is unable to recoup the money spent when it comes time to sell the property.

There is no denying that certain improvements can increase property value, but the extent of the renovation, the type of finishes, or the size of the renovation job can add or detract from the total recoupable value.

It's fairly common for homeowners to over-improve their homes because they're upgrading to their preferences and taste and likely desire the best quality and features they can achieve for their money. This may be nice while you live in the home, but the cost of the improvement may not be justified in the long run when it comes time to sell. Below are some of the ways investors and homeowners can avoid over-improving their homes and make sure they get the most from their renovation dollars.

While features, upgrades, and improvements are one factor in a property's value, location also plays a key role. Real estate, especially residential real estate, is largely valued by comparing the subject property to similar properties in the immediate market, which are called comps. Home buyers are expecting to pay within a general price range to obtain a certain quality of housing for that neighborhood. So when a home has exceeded those standards, especially to a large degree, there will be limited comps to justify a dramatic increase in price or value.

Before starting a renovation, property owners should first look at the quality of upgrades and type of features other homes in their immediate neighborhood have, and then aim to match the standards of the market. For example, if no one has a pool in your neighborhood, spending $30,000 on a pool installation could cost more than the value it will bring. However, if 75% of the homes in your neighborhood have a pool and people shopping for homes in that area want or expect that, it likely would increase your property value in the long run.

Marble or quartz countertops may be top of the line or a trending kitchen feature, but if you live in a neighborhood where most kitchens have laminate counters, it's highly unlikely that this upgrade will be repaid in the long run.

If all of the homes surrounding your property are between 950 square feet and 1,200 square feet and you decide to build a home addition that brings your home up to 2,000 square feet, there will be limited comps to justify an increase in value.

Matching the market is key. Being the nicest home on the block rarely brings your personal property value up, as the greater neighborhood dictates values for the area.

Some improvements have a higher return on investment than others. For example, installing a new roof if yours is on its last legs is a worthwhile investment. Small improvements, in most cases, produce the greatest return, especially if you're preparing your home to sell. Painting walls may not seem like a big upgrade, but changing your multi-color walls to a more neutral color that matches current decor trends will be more appealing to buyers and is a low-cost upfront investment. Painting your kitchen cabinets or adding a new backsplash may be a relatively cheap improvement that will get you a greater return than a full kitchen remodel would bring.

It can be challenging to know which upgrades are worth the cost and which aren't. Enlist the help and advice from a Realtor in your area. They can help advise you on what improvements would be valued in your market or what would be an over-improvement.

In the end, don't forget that you're the one living in your home. While it's wonderful if you can add value to your property and create equity through improvements, how long you plan to be in the home and the level of comfort you're trying to achieve also comes into play. Just make sure you're comfortable with the cost and are aware of how much value an improvement will bring once completed.

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Over Improving Property: What it Means and Why You Should Avoid It - Motley Fool