One way to add value and build equity in your home is by upgrading and remodeling projects.  If you pick the right projects you can add $1.50 to $3.00 in value for every dollar that you spend.  However, it is very important to choose your projects, your expenses and your degree of elaboration carefully. 

 

Real estate market values are very location specfiic.  When looking for guidance in what added value a remodeling project would actually provide in your neighborhood, and also some guidance in how much to spend on a project, it helps to be familiar with three principles of real estate appraisal.  Although the average home buyer has never head of these principles, their buying behavior is pretty reliably guided by them. 

 

 

 

As an owner or seller, the principle of progression means that if your home is below "the neighborhood standard" or the pretty much typical home in your neighborhood, you can feel very safe investing money in enlarging it or remodeling and upgrading it.  The higher value of the homes around it will help pull its value upward and make a solid return on your invested dollars quite likely. 

 

As a buyer, progression means that buying a somewhat sub-standard home in a valuable neighborhood is a good investment.  You'll pay less for it than one that meets the neighborhood standard and you can add to your equity substantially with improvements that you make. 

 

Regression

 

The principle of regression, on the other hand, states that a larger, extensively modernized and updated home in a neighborhood of smaller homes of lesser value will be pulled down in value, closer to the value of the homes that surround it. 

 

As an owner or seller, this means that if you have "the best house in the neighborhood" you should be very cautious about further improvements or additions.  The buyer who could afford to pay you added money for the additional amenities will most likely be looking to buy in a more expensive neighborhood.

 

As a buyer, regression means that you should be cautious about buying a home that is already enlarged and/or improved well beyond the neighborhood standard.  You probably can't add much if any value by making changes and in a slow market you may have trouble just breaking even if you want to sell. 

 

 

The third appraising principle states that homes that are substantially in conformity - in size, lot size, style and amenities - with their surrounding homes have greater value than homes that are substantially different in one or more of those qualities.  A four or five bedroom house in a neighborhood of two bedroom bungalows will not be worth as much as the same house in a neighborhood of other four or five bedrooms homes.  A 60's home in a neighborhood of 20's traditionals will not have as much value as the surrounding homes, or as it would in an area of similar age homes.

 

As an owner or seller, if you own a home that is not in conformity with its neighbors you should probably concentrate your remodeling on matching the neighborhood  in style and quality as much as is practical.  Be cautious about over spending.  Being out of conformity is not so important in a hot seller's market but it can really limit your resale dollars in a slow, buyer's market when there are many homes to choose from.

 

As a buyer, if buying an out of conformity home allows you to purchase a better neighborhood than you otherwise could, the principle of progression, plus  your own enjoyment of the home and location, may well be worth it.  However, if you are going "out of conformity" in the direction of buying a much larger home or a much more improved home in a  lesser neighborhood, be cautious, since the principle of regression will also be working against you.