If you're underwater and need to sell your home, you may be thinking about sprucing up your kitchen or adding a bathroom to raise its value in hopes of closing the gap between what your home is worth and what you owe on your mortgage.
Is it crazy to pump money into a home when you owe more on it than it's worth? Does this strategy ever make sense?
While upgrading the kitchen or dated bathroom could make the difference between a home that sells and one that doesn't, there's no one-size-fits-all approach when it comes to deciding whether to renovate under these circumstances.
If you’re wondering whether to renovate your underwater home, take the following factors into consideration.
Your situation
What is the current value of your home? How much are the renovations going to cost? And what is the home's expected value after you make these improvements?
Keep in mind that while some home improvements can result in a dollar-for-dollar increase in a home's value, most do not. If, however, there are certain problems or minor issues that are causing your home's value to appear lower than it should - like large overgrown trees in the front yard or chipped paint in the bedrooms - then making improvements may increase the chance of a sale at a more attractive price.
But be careful - you may not get as much value from renovations as you expect. For example, kitchen remodels offer among the lowest return on investments. “Every dollar you spend on a new kitchen only increases the value of your home by 50 cents - regardless of how much the renovation costs,” write Zillow CEO Spencer Rascoff and Chief Economist Stan Humphries in Zillow Talk: The New Rules of Real Estate.
If you're planning a kitchen renovation, make sure it functions well for you, and you will enjoy it. Don't fixate on the value you are trying to create when it comes time to sell.
Your market
If you live in a market where prices have plunged to such depths that even a renovation that increases your home's value by 20 percent won't cut it, you need to think twice about remodeling.
If, however, you live in a market where buyers have high expectations (and renovations are therefore valued), then you may want to consider doing it.
Your financial condition
If you're taking out a loan to pay for renovations - and yes, there are loan options available despite your situation - that means you will be taking on debt. How much debt do you already have? And are you comfortable assuming more?
Renovating an underwater home can be risky, so be sure to thoroughly research your options before you make any decisions.
Related:
- How to Budget for Home Renovations
- 4 Steps to Take Now for a Faster Home Sale Next Year
- ‘What Are Comps?’: Understanding a Key Real Estate Tool
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
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