I have met many people who have lost money when they sold their houses. In fact, I am one of those people and it has happened to me more than once.
There are a number of factors that can cause a financial loss when you sell your home, including the need to sell it at the wrong time due to impending divorce or foreclosure, or a recession in the local housing market. However, it is also common to lose money simply by making too many expensive changes to the home before putting it on the market. This is how I lost money in real estate, before I knew it.
My biggest failure in the market to fix it and change it was a house I bought in Spokane, Washington. Knowing what I know now, I would have limited myself to replacing kitchen and bathroom rugs and fixtures, painting inside and out, and buying new appliances. It probably would have also replaced the old style windows to make the place look better and appeal to the energy conscious shopper. These corrections could have easily been made within the two years you needed to live there to avoid capital gains taxes.
Since I didn’t know what I know now, I did major renovations, which included moving the bathroom. I did most of the work myself, but the materials alone cost more than I could get back when the house was sold. With the exception of repairs made to the house to make it eligible for an FHA loan and watering the lawn, I doubt that any of my major projects have actually helped me sell the house or have increased its value.
If a house is really solid, with no structural damage or insect problems, the main reason it will sell for less than its value is usually cosmetic. This was certainly true of the house I bought in Spokane. Dirty carpet and a wall in the living room covered in mirrored tiles kept most buyers from getting further into the house. I was able to see past the cosmetic issues and see the full potential of the house, but my imagination went too far.
The floor plan was odd and a bit inconvenient, but leaving the bathroom where it was would have been much more financially sound. Why didn’t I do that? Because my emotions and my nesting instincts took over, putting aside all thoughts of future gains or losses.
Let’s face it: Most people don’t buy their own homes with the intention of making a profit, although they certainly expect the home to be a good investment. In fact, the emotional stress caused by the process of buying a home and moving into it may be enough to completely erase any thoughts of moving again a few years later. However, I know of several families who have made a very good living buying low-priced houses, living in and fixing them, and then selling them when the IRS allows them to do so without paying additional taxes. Clearly, these people do not make any changes to these houses without carefully considering the end result.
After my adventure in Spokane, I decided to learn from my mistakes and figure out how to stop losing money on homes. I read books by authors who have experience fixing and turning houses, and then I read them again. When I saw that most remodeling projects hardly ever recoup their costs when the house is sold, I was a bit surprised, because I had been guilty of almost every mistake on the list at one point or another. I know many people who have also made the same mistakes, even when they started those remodeling projects with the intention of increasing the value of their homes.
When I bought my next home, I kept that list very firmly in mind. For example, my kitchen was in dire need of a major makeover (or so I thought), and it was too small. I pored over the latest home decor magazines and ideas flooded into my head. I thought about tearing down some walls, and even tried to imagine expanding the house to make the kitchen bigger. New cabinets and new appliances would be needed …
In the end I painted the kitchen cabinets and replaced the sink with a new one that I bought from Ikea. I covered the chipped orange Formica countertops with patterned cotton fabric and covered them with many coats of the water-based Verathane that was meant to protect the hardwood floors. The entire “remodel” cost less than $ 400, as opposed to the thousands of dollars I would have spent had I fulfilled my idle dreams of a “perfect” kitchen. Since the house sold at a great price within two weeks of being listed, my buyer obviously didn’t mind that the kitchen didn’t meet my idea of perfect. Because I kept my costs down, I made a useful profit on the sale.
Could you have sold the house for more money if the kitchen had been remodeled and expanded? Maybe, but not enough to cover the cost of the remodel. Although the National Association of Realtors lists a kitchen remodel as one of the projects that will increase a home the most, they still warn that you should expect to recoup only 80% of the costs. If your new kitchen is much fancier, larger, and more expensive than any other kitchen in the neighborhood, the benefits will be even less. A complete kitchen remodel can cost thousands of dollars, so the 20% you don’t get back can be a lot of change.
Does this mean that you should not make changes in your home that make you happy? Not at all, especially if you intend to live there for many years. But it’s worth sitting down with your spouse or significant other before you start making your remodeling plans, determining exactly how long you’ll be staying in the home, and then thinking about all the financial implications of the remodeling project. Even if you don’t consider yourself a professional home buff, it might help to slow down a bit and find ways to improve your home without spending money that you will never see again. As a bonus, your family could avoid the stress and disruption of all that remodeling mess.