Is improving home's basement wise during soft market?

By Dian Hymer

Should you  invest a good sum of money in your home if housing prices in your area are flat  or declining? When home prices are escalating, adding more money to an asset  that's increasing rapidly in value is a no-brainer. But given current market  conditions, it's more important to consider the financial ramification of a  renovation before giving your contractor the green light.

First, find  out how much the anticipated project will cost. Then add 10 to 20 percent for  cost overruns. The next step is to figure out how much your home would be worth  after you complete the improvements.

The market  value of renovations varies from one area to the next. According to Remodeling magazine's Cost Versus Value  Index for 2006, a mid-range basement renovation -- in terms of cost and  finishes -- returned on average approximately 80 percent of the cost when the  home was sold.

For  comparative purposes, the basement renovation used in the Remodeling report consisted of a 20-by-30-foot entertainment room  with a wet bar and bathroom. To determine the return on investment, Remodeling, in conjunction with the  National Association of Realtors, relied on data compiled from a survey of  Realtors.

Even though  the national average return on the basement renovations was only 80 percent, a  comparable job in San Francisco  returned 112.7 percent of the cost. So consult with a knowledgeable local  Realtor to determine how much the improvement you are contemplating will  increase the market value of your home.

Investment  potential is just one variable to consider when weighing whether to improve  your home and how much to spend. Quality of life is a major consideration.  Generally, the longer you plan to stay in your home, the more it makes sense to  make improvements that will make your home more user-friendly. However, keep in  mind that a basic rule of investing in real estate is to avoid overimproving  for the neighborhood.

HOMEOWNER TIP:  To get the most out of a major renovation, make sure that the work is done with  building permits. Sellers and contractors often proceed with major renovations  without taking out the appropriate permits, either to save time or money. This  might not matter to you if the work is done well and in accordance with  building-code requirements, but it could come back to bite you when you sell.

Appraisal  standards have tightened recently along with credit standards. Today, an  appraiser might not count a basement conversion as livable square feet unless  the homeowner could show that the work had been done with permit. This in turn  could result in an appraisal for lower than the buyer agreed to pay if you  represented that the den added value as livable square feet.

When the  market is racing upwards, a low appraisal won't necessarily cause a deal to  fall apart. But, in today's environment, an appraisal for less than the  purchase price could cause a buyer to renegotiate the price, or back out, if  the seller isn't willing to take less and the purchase contract includes an  appraisal contingency.

It's quite  common to find basements that were finished without permits. Sellers should  take care how they market such improvements to a prospective buyer. In California, state law requires buyers to disclose if work was done without permit. Misrepresenting  livable square feet can have serious legal consequences. Rather than take that  risk, make sure the buyers know exactly what they are buying.

THE  CLOSING: It's prudent to be conservative when representing the livable square  feet of your home. Sellers have ended up in court over disputes about square  footage.

Copyright 2007 Dian Hymer Distributed by Inman News