What the Numbers Mean

When comparing cost estimates for actual projects, remember that averaging tends to have a leveling effect on "Job Cost" data from the 2007 Cost vs. Value Report. And as always, seemingly small differences in size, scope, or quality of finishes can dramatically affect final project cost (full project descriptions are available here).

It's also important to consider whether a remodeled space reduces the perceived number of rooms or available square footage. For example, carving a half-bath out of unused storage space under a stair case is an obvious gain in usable space. But converting an existing bedroom into a master bath, while a positive development in many respects, may reduce the total number of bedrooms below the minimum expectation of typical prospective buyers.

Finally, local conditions also play a part, causing our data to appear too high or too low, even when comparing neighborhoods in the same city.

In a typical real estate transaction, the "cost recouped" for a given remodeling project depends on a variety of unpredictable factors, many of which are more important than the construction cost. These factors include the condition of the rest of the house, the value of similar homes nearby, and the rate at which property values are changing in the surrounding area. A home's urban, suburban, or rural setting also affects its value, as does the availability and cost of new and existing homes in the immediate vicinity.

Where resale value is a major factor in a homeowner's decision to remodel, the best course of action is to consult with a local remodeler about construction cost, and ask an experienced Realtor about home prices in the neighborhood.

High and Low Values
Every year we get questions about results for some projects in certain metropolitan areas that show a Value recouped of more than 100%. For many people this seems inconceivable, but although more the exception than the rule, it is not as difficult to understand as it seems.

The first factor to consider in the overall real estate market in the city in question. In a white-hot market, such as we have seen in places like Washington, D.C., San Francisco, and Chicago in recent years, property values typically rise rapidly, regardless of whether remodeling takes place. Under these conditions, investing in certain types of remodeling projects can cause home value to accelerate to the point that the project adds more to the resale value than it costs to build.

Even in less volatile markets, however, it's possible to recoup 100% or more under certain conditions. Take the example of a two-storey house that is in comparable condition to others in the neighborhood, but lacks a half-bath on the first floor, something other homes in the area have. Many prospective buyers won't even get out of the car to look at the house because it fails to meet the tacit minimum standard of a bath on every floor.

In these circumstances, (and notwithstanding the caveats affecting resale value mentioned above), a homeowner who contracts to build a half-bath on the first floor might well be able to recoup more than 100% of construction costs upon resale because the remodeling project has brought the house in line with buyer expectations. In fact, the house now has the most up-to-date bathroom in the neighborhood, giving people shopping for a home a good reason to stop and take a closer look. In a case like this, in fact, not adding the half-bath could cause the home to sit on the market for much longer than is normal, and to eventually sell, if it sells at all, for less than similar homes in the area.