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Designing for the Future: The Real $$$ of Renovations

Know the numbers and steer your clients wisely
By Dick Wolfe
February 14, 2012

The bad news on the housing market just keeps coming. I won’t dwell on the latest numbers other than to say they are still dropping significantly. This affects the renovation/remodel market because no one likes to invest in a declining asset. Plus, less value in the home means less opportunity to draw equity out for updates, which is where most renovation funds come from.

More help from the government appears to be on the horizon for underwater homeowners. However, it’s unclear whether this help will extend to those who are current on their mortgages and this is the group that might have disposable income if they could re-finance to a lower rate mortgage or reduce the principal owed.


THE TRUE VALUE OF RENOVATIONS

It’s no secret that one of the main drivers for doing home renovations is to add to the eventual resale value of the home. Many homeowners have operated under the misconception that a dollar invested in updating some or all of their home will return not only that dollar, but a profit. With the advent of the Internet and other research tools, where statistics on the true value of renovations can be more easily found, this misconception has been overcome to some degree.

Today, most homeowners are likely aware that the return on investment (ROI) on renovations is somewhat less than 100 percent, although they may be murky on exactly what to expect. During the boom days, when renovation ROI was 80 to 90 percent of the money spent and updates were facilitating quick sales of assets that had already increased greatly in value, this was not a big issue. The trade-off was more than made up in the ability to sell a home almost instantaneously near (and sometimes above) the asking price. Unfortunately, that scenario has shifted drastically both in terms of renovation ROI and the ability to sell a home in a reasonable amount of time at a profit.


WHAT IT'S WORTH TODAY

The current ROI for home renovations on average is around 58 percent of dollars invested. Quite a drop, eh? As stated, that is the average. Certain renovations return more, others not as much. For example, a mid-range kitchen remodel costing $55,000-$60,000 will return about 66 percent of the investment. Adding a sunroom will only return 46 percent, less than half. Building an attic bedroom is one of the better renovations as far as ROI paying back over 70 percent.

One thing to be aware of is that all renovations are not created equal. Increasing spending to do a more upscale renovation can actually cost money. If you double the price of the kitchen remodel above, the ROI goes down to around percent.


WHAT DOES IT ALL MEAN?

Your client is looking to you for your expertise, not only in design, but in the business side of the equation. They need you to explain to them clearly what they can expect out of their investment. Sit down with your client and explore their reasons for doing a renovation. Have them articulate both their lifestyle and financial goals. Then give them a realistic assessment of what to expect.

Any recommendation you make should be based in fact and give the client as exact a picture as possible of what to expect. If they are considering a sunroom, you need to give them the facts. A sunroom is a nice-to-have, not a must-have, and therefore will not return a premium when it comes time to sell. An extra bedroom, an updated kitchen, new siding or new windows are all better investments from a sales perspective because they are basic to the function of a home as living space. You do the sunroom for your personal pleasure, not for the ROI potential.

You also need to be honest in situations like the luxury kitchen remodel above. Tell the client that spending more won’t necessarily get them more. Perhaps you can still sell them on a bigger spend by suggesting they divert the extra money they were going to put into the kitchen to another project that will pay better dividends. Or, maybe you accept the fact you will make less on this job, but your honesty will get you referrals as a trustworthy professional and pay off down the road.

Don’t go for the short-term gain by hiding the facts. Show your client that you’re knowledgeable and have their best interests at heart by giving them the most complete data you can. It’s easy to find. Then do a great design job. That’s the right way and the best way to grow your business.


—Dick Wolfe is SVP of The MWW Group, an award-winning independent public relations agency that specializes in helping design effective marketing programs for well-known consumer brands and business-to-business companies. Wolfe brings deep experience as a trusted communications advisor to companies seeking successful brand positioning, marketing communications and visibility campaigns that focus on the design/build community. To contact Wolfe with questions and suggestions on topics for future articles, please email him at dwolfe@mww.com.
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