There's no doubt Canadians are spending millions on renovations, but are they investing in the right things? Is every renovation loonie generating the maximum increase in property value?
Sellers don't usually discover whether their renovations yield the desired value increase until they see a buyer's offer. Television make-over and staging shows make sweeping statements about increasing value, but for certainty in achieving significant increases in property value call the value experts: professional real property appraisers, including those who earn the AACI designation from the Appraisal Institute of Canada (AIC).
"If you spend C$10,000, you could expect 90 per cent return, but this is not always true as there are thousands of variables and the biggest one of all is location," said appraiser Michael Garcelon AACI, Communication Chair and President/CEO of Northwest Properties, his Saskatchewan real property evaluation firm. "If you compare [renovating] a house in a big subdivision in Toronto and in Iqaluit , the return is not the same. These are estimates and depend on many factors. The estimate of return given will be good for as long as market conditions continue. Natural disasters may have an effect on building costs over the coming months, but market value may not increase at the same pace."
Payback on renovations also depends on how the value of your property compares to neighbours' real estate. If your home's value is above the average market value, you can expect a relatively low return on renovations. But if your home's value is below the average market value, you can expect a much higher return on investment.
RENOVA , based on a nation-wide web survey of AIC members, is a research tool for consumers trying to decide which renovations make sense. Renova ranks a number of different improvements and projects a return, but it cannot calculate the impact of poor quality of workmanship or materials. For example, RENOVA provides a payback amount on a C$10,000 kitchen remodeling between x and y dollars depending on location and other factors.
The results of the AIC 2004 Home Renovation Survey revealed these renovation projects consistently generated the highest payback:
- Bathroom renovation (75-100 per cent)
- Kitchen renovation (75-100 per cent)
- Interior painting (50-100 per cent)
- Exterior painting (50-100 per cent)
Some improvements may improve saleability, but not net a full return on investment, including landscaping, interlocking paving, new fencing, adding a swimming pool (10-40 percent) or installing a skylight.
"Value holds as long as the finish is in good condition and decor stays in style -- as long as it's contemporary in design," said Garcelon, emphasizing that while AACIs are not in the interior design business, they must know what current buyers value. "I've been in a house with shag throughout in pristine condition, but the buyer says 'yikes, I'd have to redo all the carpet.' AACIs are in the consulting and advisory business and will have home owners who think of selling and have a number of renovation projects to consider. [ACI] members do cost benefit analysis on different renovation projects in order to determine which would have the best return. The sky's the limit, but anything over 100 per cent in the short term is good. Otherwise why bother?"
Cost Benefit Analysis involves first determining what the current market value of the property is before renovation and then estimating market value as if the improvement were complete. Consumers are asked to get two or three materials and labour quotes from reputable contractors (those who place the emphasis on submitting realistic reflections of cost, not on low-balling to get the job). The projected increase in market value is compared to the cost of renovation and the result usually expressed as a percent return. Homeowners can then decide which renovations hold value for them now.
Property owners can get free market evaluations from real estate salespeople and brokers or use RENOVA to get ball-park ideas on renovation returns, but is this the correct level of investigation when a renovation can cost tens of thousands and may completely disrupt a family's lives in the process?
"This isn't something we do for free," said Garcelon. "Real estate agents are not appraisers. They are experts in selling and marketing real estate, and they are paid by commission. Our skill is estimating market value and we are paid on a fee-for-service basis so we are completely objective. The fee depends on the market and how much research and analysis is involved. Generally, cost benefits are in the C$300 to C$500 range. For this you get some very good reliable, objective advice on what the renovation project would give on return, a full written report on the analysis and its conclusion -- whether there is an acceptable rate of return."
If the increase in value does not materialize, consumers can go back to the appraiser or complain to the Institute.
"Real estate appraisal is a science and an art, but mostly a science, but there are a lot of judgement calls that must be made," said Garcelon. "All members of AIC do carry Errors and Omission Insurance that protects our clients and our members. It is something we take very seriously and we have disciplinary committees that take this very, very seriously. All appraisers are cognizant of our public image and that is why we have a Counsellor of Professional Practice."
In Northwestern Saskatchewan, Garcelon says the hot value features are high-efficiency furnaces and all hardwood floors to insure good interior air quality. Swimming pools are considered an expensive liability.
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