Looming Home Improvement Crisis
Same Day Carpet Cleaning Long Beach — It seemed like when it came to house improvement, you couldn’t go wrong in recent years. The property ended up being worth more than the original cost plus the cost of modifications, regardless of what renovations were done or how much money was spent.
In fact, many people have made a living by buying a property, giving it a rapid makeover, and then selling it for a profit.
Almost every remodeling appeared to be profitable on paper. Despite this, many home modifications are a financial disaster, often without people’s knowledge. How can this be?
The explanation lies in the continually growing market prices of most homes, particularly those in sought-after places such as California USA and Queensland Australia. Poor home improvement decisions will be hidden by a rising market.
To give an example, Consider a $400,000 house purchased in 2004. In 2005, $60,000 is spent on upgrades, and the property is sold for $500,000 in early 2006. That’s a profit of $40,000 on the renovations, right? Let’s leave aside the transaction and holding charges for simplicity.
Maybe. Perhaps not. You see, what you need to consider is how much the home would have sold for in 2006 if no upgrades had been made. Let’s imagine the unimproved property’s value increased to $450,000 during the 2004-2006 period as a result of general market growth. This equates to a profit of $50,000, $10,000 more than the profit made from the home upgrades that were made earlier.
The home owners needed $60,000 to cover the renovation expenditures, as well as all of the time required to monitor the renovations and/or undertake some of the work, in order to make the upgrades. And they would have made more money by doing absolutely nothing!
You could be thinking, “Well, it doesn’t matter really, because the property is still able to be sold at a profit”, and to an extent you are right. When the market stops developing and flattens out, the problem arises.
During 2005, hundreds of house renovators on the east coast of Australia were caught out in exactly this fashion, when the property market in major cities went definitely flat after a robust boom period ended in 2004. Many renovators who tried to sell their properties found that the market price was less than the original cost plus the home renovation charges because the market had stopped rising.
Those renovators who did not actually have to sell, had the option to wait for future increases in the overall market to lift the price of their property enough to cover their costs. But those who had to sell after carrying out unwise home improvements found that they were facing losses, in some cases very substantial losses.
The flow-on effect for the Australian market has been that there are few property investors around now, and expenditure on home improvement products is sliding.
The property market in the US is still quite buoyant, but there are many signs that the market’s bull run is coming to an end. This is a time for home improvers to be cautious.
It is still possible to undertake profitable home improvements, but renovators need to follow strict guidelines and be very disciplined in their approach. Home improvements need to make financial sense whether the market is going up or not. After all, no-one wants to be caught once the music stops.