Ways To Lose Money In Real Estate #5 (Capital Improvements)

 In #Real Estate Investing, #Thoughts

Over-improving your home is one of the easiest ways to lose money in real estate.

Dream kitchen? Master bathroom remodel? Addition? You are likely to come out behind on most dream remodel projects unless you do these projects yourself.

See other videos in the series here.


[Video Transcript]

Hey all, Zach McDonald your real estate agent with Real Property Associates, and this is episode number five in the series How to Lose Money in Real Estate. Today we are going to talk about your dream remodel project. I’m going to mess with it. I’m going to mess with that dream remodel project because I think this is one of the ways and one of the places that people lose money in real estate, and they don’t even think about it. I’ll share a few examples here.

The first one … I’ve had multiple friends recently that have gone through some pretty major, major projects, and we’re talking hundreds of thousands of dollars to remodel kitchens, extend the house, things like that, and these people knew upfront that they were spending a lot of money for these projects to make it exactly how they wanted it. They were going to be getting exactly what they wanted in the neighborhoods they wanted, locations, all those things. So, they knew going upfront into it that they were going to be potentially spending more money than they would get back losing money in real estate, but they’re getting exactly what they wanted. The idea there is that time does heal the wound. Over time they would essentially get that money back by staying in their house for another 30 years, which I think is probably fair. They probably would end up making at least that money back, but it’s a way that they’ve lost money. I see it going into a sale. There’s a propensity for people to want to do a lot of work to update the house before they go ahead and sell it.

The other story here is one … The first story was just some friends that were planning to live in their house for the next 30 years or until they die pretty much. There’s no other plan. So, they’re going to fall right into that sell too soon … they’re not going to sell too soon. They’re going to hold on to it for a long time. They’re investing in their own happiness essentially.

The other story is a client of mine that I’ve worked with that they’re actually selling their house and they, after a lot of conversations and work on my end, they decided they were going to list with a different agent, a friend. I think I big reason that they didn’t work with me is because I told them that it would be better to sell their house last year without doing hardly any work to it. My advice was that we do the very minimal and then put the house on the market. Somebody else is going to do a remodel to the house.

It definitely needed a full remodel. The house has a beautiful view, it’s in a great location, but there are some things about the house that are a little quirky and to be honest, it did need a lot of work.

Now, my advice was to sell that house a year ago without doing any work to it. Well, that’s not what he wanted to here, and so he asked me multiple times like, “Okay, well what else can we do to it to make the house worth more?” And I gave him some more advice. We talked about it, and as we talked he started telling me, “Well I want to get this price for it.” I was like, “Well I don’t think we’re going to get this price for it even if we do all this work,” and I kept being honest on the price.

Eventually, somebody else said, “Let’s do even more than Zach said to do, and we’re going to get you this price that you want.” Cool. So, he decided that was what he wanted. Now, I’ve had the opportunity to just be on the sideline and watch as this house that I didn’t get the listing for, and it was beautifully remodeled, so kudos for that. It looked great, but he put a lot of money into that remodel, and the house started $250,000 above what it’s now listed for. It’s now listed for what I told him we should have listed it for a year ago when the market was even more competitive and frenzied in the area. It’s listed for about 50,000 more than I told him to do without doing any of the work to it.

So, looking at it, he’s put a whole bunch of money into this house, was hoping to get a bigger price, which would have been great, but I didn’t feel like it was realistic, and then now to see it still on the market selling for what we talked about without hardly any work to it. It’s honestly just kind of sad. It’s a sad situation to see, and it’s a story that I think really illustrates the point that, that dream remodel project even though you want to have just that beautiful finished project, if you are making capital improvements to your house that aren’t increasing the value or maybe eliminating a problem with the sale …

So, there are certain things you can do that will add value. There are also things that will remove a problem. There might be some things about the house that are quirky and people wouldn’t necessarily like. So, if you can remove those barriers now you have a bigger buying pool. Both of those are great. If you can make an improvement that gives you more money than what you spent on it, that’s a win. Same with removing an obstacle to a sale because you want to get a sale.

The issue is that most remodel projects, and there’s a … Remodel Magazine does a cost versus value analysis. Every year they interview real estate agents, contractors, homeowners. It’s a really big, extensive study, and what their goal is to do in each area, different markets in the US is figure out what projects typically cost on average, and then what the ROI is and what the added value is. The large majority of these projects and we’re talking about your dream kitchen remodel. We’re talking about that addition. We’re talking about the second story on your house. Those kinds of things … negative. You spend more than you get back. So, if you were planning like my friends that are going to live in their house for the next 30 years, awesome because that’s for … You’re doing that for yourself, and you’re going to live there for a long time.

If you’re trying to do a quick remodel before you sell it you just have to know that there are only a few things, and these are things I talk about with people, that are really going to get you a positive return. That might be replacing the deck, or repainting the interior or the exterior, or doing a minor kitchen remodel not the full extensive knock out walls and go the full nine yards, and it might not be that master suite remodel or addition. It’s a huge place that people lose money. It feels good when you’re a seller to see a bigger price tag on your house, but you need to be really cautious.

So, I’m off my soapbox. I’m going to step down now, but do know that one of the big ways that people lose money in real estate is by making improvements to the house that cost more than they actually return in value. So, thanks so much for watching this video series: How to Lose Money in Real Estate. I know it’s a little funny of a title, but it is very practical. There are a lot of ways to lose money in real estate. It’s important that you’re aware of those so that you can actually make money in real estate. If you find this content helpful please consider subscribing to my YouTube channel and you’ll see more videos like this moving forward. Bye for now.

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