Quantifying Resale Value of Home Repairs in Los Angeles

A common misconception in real estate is that capital investment projects always yield positive rates of return (ROI). In reality, most home improvements lose money on resale.  In Los Angeles, for example, improvements projects typically recover between 50%-80% of their cost.

Remodeling Magazine provides a quantitative breakout in its Cost vs. Value Report for 2009-2010.  The report analyzes regions and subsets of the housing market.

21 home improvement projects were analyzed, ranging in value from $1.2K to $156K for the mid-range residential market.  All but one project – installing a steel entry door – are losing propositions, in terms of investment merit.

For instance, a $28.4K home office remodel will only add $13.6K to your home, while converting your attic into a bedroom will return 83.1% of costs.

As you would expect in a recession, cost recapture values are decreasing relative to last year. Only 4 of the 21 mid-range projects analyzed increased recapture values from the previous year, with the rest losing ground.

There are two important reasons you might still consider making capital improvements:

• You are preparing to sell your property in a competitive location.  In some markets even small improvements can tip the scale in favor of a buyer purchasing your property versus your neighbors.
• The improvements are meant for you to enjoy.  This puts the improvement in the “consumption item” category.

Note that capital improvements can be added to the cost basis for your property, meaning they will reduce capital gains tax liability.  On this basis, the costs of improvements should be adjusted to reflect tax savings.

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