Expert: Jessica Bryan - 2/9/2012

Question
QUESTION: I purchased my first home about one year ago. It is a 2 bedroom, 1 bath single family home in a Los Angeles suburb. My wife and I would like to add a second bathroom, not just for our comfort, but also for higher potential resale value. We have been approved for a 203k rehab loan to add the second bathroom and a few additional improvements to the home (new kitchen countertops, new hot water heater, fence repair). This will set us back about $30K on top of our current loan balance of $265K.

I just saw a house in move-in condition just up the street that is a 3+2 listed at $290K. My question really boils down to this: should we do the addition of the second bathroom and other improvements or not? Should we just leave the house as-is and wait for the market to come back around a bit more until we can sell? Or do we sell our home now and try to buy something that already has the number of bedrooms and baths we want? I am really torn on what to do. Obviously, it is difficult to predict what the real estate market will look like in the coming years, but we would be staying in our current home no longer than 5 years from now.

What do you think our best bet is?

ANSWER: Dear Michael;
My initial response is probably not what you want to hear: the home down the street that is on the market for $290K will probably not sell for the full price so the value for the 3 bd 2 bath home is actually lower than that amount. If you are thinking that the value of your home will increase to more than the one down the street...I doubt that you will see that since you aren't adding an additional bedroom. This means that if you do the improvements you will have added more cost to the home but probably not as much as the improvements cost you. No doubt on top of the mortgage of $265K plus the additional $30K which brings the total to $295K, you then have closing costs and lending fees along with down payments that means you might have close to $300,000 in the home. (or more). You will probably not recover this cost when you sell if you were to sell soon.  Even if you do not do the repairs and addition you might not recover your costs.  You cannot hope to recoup your costs when you sell unless the market bounces back quickly (which it may.)LA suburbs are quite volatile which means that you might see rapid price swings in a short time.  One strong earthquake and prices will drop...a small swing in the economy and prices will climb! Because we are in a time of economic changes it is impossible to predict what your investment will net in a few years. However, it is also important to note that selling your home as is will probably not make you a profit either.  If I were in your position I would call a local REALTOR to give me a market evaluation and show me what prices are doing, what comparable homes are selling for today, and what his or her sense is of the local neighborhood market.  Since I do not know which suburb you are in or whether or not there are local conditions that could affect the prices up or down the local expert should be consulted.  

There is another factor to consider: regardless of whether you gain or lose money on your home; what is it you can afford and what do you really want to do.  Often over my many, many years as a real estate agent I have heard people debate the merits of a home because of the investment.  Sometimes I have to remind them of one fact...home ownership is not just about investment. It is also about lifestyle and personal satisfaction and enjoyment.  If you bought something that you knew absolutely would lose value would you still buy it?  Of course you would!  That's what you do when you buy a car!  So; if you decide to fix up a home to enjoy it and it doesn't net you the profit you hope it would; so be it.  You still get enjoyment from it.

Best wishes,
Jessica Bryan

---------- FOLLOW-UP ----------

QUESTION: Thank-you Jessica for that very thorough and well thought out response. My home is in the San Fernando Valley, in Winnetka. I'm not sure if you are familiar with that area, but if so, I thought that you could weigh in a bit more now that you have this information. Thanks again.

Answer
Hi Michael;
Your area is an older community meaning that there is a depreciating value in the homes and many require major updates.  Since I haven't seen that area in about 15 yrs I don't know how much improvement has gone on. If you see properties being bought up and refurbished or even raised with new homes being built in older homes' place then you have a better investment.  I don't know if that is the case in your community.  Again: consulting a local agent who is actively selling your neighborhood will help you with the decision.  Sorry I can't be more precise but even where I practice real estate(Chapel Hill, North Carolina)I have to take neighborhood by neighborhood rather than using a sweeping generalization to evaluate properties.

~Jessica Bryan