Remodeling
Success 101

Q: What is "flipping" a house?

A: "Flipping" homes is a real estate investment business in which people (in some cases, contractors) buy older homes, make minor or necessary repairs or upgrades, and put them back on the market quickly to recoup their costs and, ideally, make a profit. Typically, there is no intention on the part of the investor to live in the house or remodel or improve it to suit personal needs and tastes; rather, the upgrades are designed and finished to suit what the market demands. Flipping homes is a highly speculative and risky investment, requiring careful study of market trends and skillful timing to be successful and profitable.

You already knew that the house needed new paint. Then you began to notice the worn carpeting. After the washing machine flooded the laundry room and the TV gave up for good, you found yourself thinking about maintenance plus some remodeling. You realize that by bumping out that wall, you could add a bathroom on the other side of the laundry room and a home theater on the other side of the family room. Maybe even a guest room above.

The family is ecstatic. The two of you have always been movie fans and the kids can't wait for the wide screen plasma TV. You know that your mom will love having a room of her own when she visits. So you sit down with pencil and paper to figure out a budget when it hits you: how will this potential remodel affect the value of your home? If you sold your house after improving it, would you be able to recoup your investment?

This is known as the "cost vs. value" debate. Will the cost of the remodel add to the value of your home, and if so, how much? To start with, remember that a well-maintained house will always be more valuable than a "fixer-upper," even in a down market, so new paint, carpet, and up-to-date appliances are likely to preserve or raise the value of your home. But what about additions, major upgrades or reconfigurations of existing rooms?

Remodeling magazine publishes an annual "cost vs. value" survey, in which real estate agents and other experts in 60 markets nationwide estimate the one-year payback of various remodeling projects. The magazine concludes that the average return on investment is about 83 percent -- i.e., you won't break even -- if you sell your home within a year of completing the project. So if you are considering selling your home within a year, you may not retrieve a dollar for dollar pay back. It is more typical for our clients who remodel to wait several years before they sell. As an example, if you waited five years before selling and assuming average appreciation, industry data suggests that you are more likely to recoup your entire investment and in some cases more. In the meantime, you enjoy an enhanced lifestyle and quality of life.

In addition, the cost vs. value survey changes from year to year. Just five years ago, for instance, a modest bath remodel showed an average estimated payback of only 85 percent. Then in 2005, that payback jumped to 102 percent. During the same time period, a mid-range master suite addition dipped from an 87 percent payback to 82 percent. All of these figures are national averages, so you can expect local variations depending on housing demands and types of projects.

Although the "cost vs. value" debate is appropriate as you consider your project, it is only one factor in your decision-making process. By putting the tastes and wishes of a theoretical buyer (at a theoretical time in the future) before the tastes and wishes of your family, you may compromise the value of your investment for your family. What if an expert could prove to you that a rec room with a wet bar would add more value to the resale value of your house than a home theater? Of what worth is that investment to your family if you don't want a rec room with a wet bar?

So gather the family around. Pull out the magazines and talk about how you like to live and what would make your home more valuable to you. Use the "cost vs. value" debate to roughly cross check your conclusions and, if appropriate, take the plunge. After all, it's your life!

Warm regards,

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