Buyer Beware of Excessive Home Improvements

A time-tested approach to making money in real estate is to buy a home, make improvements to it and then reap the appreciation gain when you resell the home. While this approach has certainly worked for many, it can lead to disastrous results for seller and unwary buyers.

When a person purchases a home, they buy it for both the current appearance and their vision of how they can improve it. The improvement vision tends to be an emotional decision, one that can lead to financial problems. While improvements area a good idea, most people do not take the time to evaluate how much they can spend on improvements and still make a profit on the resale of the property. Instead, they overspend on improvements and then realize the comparable homes in the neighborhood will not support a price that recoups the cost of improvements.

For instance, the seller may put $100,000 into new bathrooms and kitchen accessories only to realize the appreciation from such improvements is $50,000. In an effort to resolve this issue, the seller will list with a high price and is usually not particularly motivated to lower that price in negotiations until the property has sat on the market for some time.

As a buyer, you have to be very careful when considering the purchase of such homes. These homes will almost always be priced at the top of the market. While they may look nicer than any other home in the area, you must ask yourself whether there is room for the home to appreciate over time. Often there is not, which means you just end up buying the seller's problem.

While buying a home is an emotional decision, you must be able to objectively crunch the numbers. Buying at the high end of the market is rarely a good idea.