Few can resist a classic makeover story – and home transformations are no exception. TV networks have built empires making it seem that anyone can take an outdated, ’70s bungalow and turn it into a dream urban escape – doubling the home’s value in just 30 minutes.
But how easy is it, really, to make a profit off of home renovations? You’d be surprised, says Christian Fuentes, a RE/MAX real estate agent and owner of RE/MAX Top Producers in Diamond Bar, California. Not only has Fuentes himself flipped more than 400 homes in his career, he frequently offers advice to clients on potential home updates that can improve their house’s value when it’s time to list.
“I think renovations are important to consider in any market,” Fuentes says. “Making updates will help the home show better and could help you net more money at the end of the day. Buyers love homes that are turnkey – their first impression can make a big difference in your final sales price.”
But before picking up a hammer, sellers should consult with a real estate professional, Fuentes advises. Each home and market is different. An agent can specify which updates will have the biggest return on investment and also advise if a home may be fine to sell as-is.
“If you’re looking to sell your home and you are planning to do some renovations beforehand, get advice from a professional who can give you guidance,” Fuentes says. “An agent can offer advice on everything from what colors to paint to what flooring to choose, and what will really make an impact in the sale.”
Ready to list or wondering if it’s time to renovate? Here are a few important questions homeowners should consider asking an experienced real estate agent.
1. 'Are there simple updates that can have a big impact in my home’s resale value?'
Updating a home doesn’t have to involve a complete overhaul and demolition crew. Before getting too carried away with updates, Fuentes often reminds his sellers that the buyers will want to make the house their home, too.
“Unless a home is completely remodeled, I think many buyers are going to end up making their own updates to make the home exactly how they want,” Fuentes says. “A lot of times I tell clients, ‘Don’t spend too much money because you just want to make it look good enough for a first impression.’”
For quick and simple updates, Fuentes says sellers can start by updating finishes, such as replacing door knobs or faucets with fixtures in trending colors such as black or brushed gold. Lighting fixtures are another area that can be easily and often inexpensively updated.
“Small repairs can make a pretty big difference and will make the house look better when potential buyers tour it,” Fuentes says.
For an even bigger impact, sellers should consider the power of paint. Adding neutral or modern colors to key features or even repainting the walls can completely transform a room.
Fuentes offers an example of a home he recently represented with an original brick fireplace dating back to the ’80s. To help modernize the room, he advised the owner to paint the brick white and add a matching wooden mantlepiece above it.
“For less than $300, we turned a fireplace into a focal point of the property. The home sold for $50,000 over asking,” Fuentes says.
2. 'Which home renovations will give me the biggest return on investment?'
While new hardware and fresh paint may be enough to get most homes ready for the market, nothing stands out like an updated kitchen or bathroom, according to Fuentes. These renovations can be more expensive – depending on the size of a home, a full kitchen remodel can cost upwards of $20,000 – but they also tend to have the biggest influence on resale value.
“If you have the money to do a new kitchen, why not? It can be one of the biggest factors in helping you sell a home and getting top market value,” Fuentes says.
The return on investment from remodeling will be different for every home, and sellers should weigh carefully how their updates may impact resale value. However, Fuentes says as a general rule, he has seen clients double their upfront investment in renovations once the home is sold.
“For example, if you spend $20,000 on rehab, you could get the $20,000 back and make $20,000 on top of it,” he says.
Popular kitchen updates Fuentes has seen include tiling backsplashes to create a focal point in the room, adding in islands and replacing old countertops.
“You’d be surprised at how inexpensive and easy a counter can be to replace,” Fuentes says. “If you currently have older tile or other material, you could add in a nicer stone or even do Formica countertops.”
3. 'How can I fund (or afford to) pay for home renovations?'
The cost of renovating can add up quickly, which is why it is not uncommon for homeowners to fund a project through supplement financing such as a Home Equity Line of Credit, or HELOC.
Working with a mortgage professional of their choice, a homeowner may be able to open a line of credit worth up to 85% of their equity (equity is defined as the market value of the home minus the remaining balance of any mortgage loans or other liens or loans secured by the property). For a set time period, often the first 10-15 years after opening the line of credit, the owners have to make only payments on the interest of what they borrow (there may also be a minimum monthly fee that a borrow has to pay to keep the line open). After the initial interest-only period, the consumer would have to make principal and interest payments, but if HELOC proceeds are used for renovations shortly before sale, the interest-only period may still be in effect and the loan balance can be paid off when the home is sold. Ideally, the renovations will help the home sell at a profit.
“If you’re looking at doing improvements for the purpose of selling your home, I would definitely recommend you consider a home equity line of credit,” says Dianna Gibson, a Loan Originator with Motto Mortgage Results in Bentonville, Arkansas. “That way you aren’t paying the extra closing costs you would be with a traditional refinance, and you’re keeping your current interest rate on your mortgage loan.”
Important to note: If the home isn’t sold or the HELOC isn’t paid off within the set interest-only period for the particular line of credit, the consumer will need to make monthly payments of principal and interest and may be faced with what is called is a “balloon payment” that will become due. This is a lump sum to cover the remaining overall principal balance borrowed under the HELOC. And as a HELOC is secured by a lien on the consumer’s home, there is more risk involved if an owner’s circumstances change and they are unable to make payments and unable to sell the home. Also, a HELOC will likely have a limited draw period in which the consumer can borrow money, so it might be best to ensure that the total amount needed for renovations is taken out during that draw period.
“If you take out a HELOC, you may want to be mindful of making extra payments to actually pay down that balance, otherwise, you may never pay down your balance,” Gibson says. “Some people are really good about making those extra payments, but those that make just the minimum payment may be surprised when principal and interest payments and/or a balloon payment comes due.”
Another option to finance a remodeling project may be a cash-out refinance, which might make sense for those planning to stay in their home a few years longer before selling and who have significant equity in their home.
A cash-out refinance is a new first lien mortgage loan that is in an amount higher than the remaining principal balance on a consumer’s mortgage loan (the loan balance on the refinance loan is generally between about 80%-90% of a home’s then-market value). The new loan pays off the original mortgage loan, with the remaining balance paid out in cash to the homeowner less closing costs and fees.
According to Gibson, “Let’s say you owe $300,000 on a house, and it’s worth $400,000. You may be able to take out a new loan for about $320,000. The original mortgage loan is paid off and you would get a check for nearly $20,000 minus fees and costs to spend on the renovations.”
Cash-out refinances often have a lower interest rate than a HELOC, and there’s generally no balloon payment after 10-15 years, which is why they may make more sense for those planning to stay in their home for a few years after the updates are made.
When it is time to put a home on the market, many experts agree – even in a competitive market where buyers have fewer options, many are still searching for an updated home. It’s simple – buying a home can be stressful enough. Why add the hassle of renovations?
“People know that updating a home takes time, money and finding the right contractors. A lot of people just don’t want to do the work, it’s a headache,” Fuentes says. “That’s why many buyers prefer an updated home. They would rather go and find something that’s already done and ready for them to move in.”