- Posted September 2, 2013 by
Design Upgrade Areas
In terms of home improvment and DIY, never build a Taj Mahal. Building a Taj Mahal reduces the return substantially and may not add to the overall enhancement of the home. A Taj Mahal is obviously any home that has been “over” improved comparable to other homes in the same subdivision. Ultimately, adding too many upgrades will create a diminishing point of return, to the point that it may be difficult to even comp the property out, given there’s nothing like it within the immediate market area. This would be an appraiser’s nightmare and a homeowner/investor’s loss, given that the actual cost of the upgrades will plateau to a certain level, and cease to add additional market value to the home. And quite often, once you’ve paid a percentage of these upgrades in the form of a deposit to the builder, whether it be zero to 50 percent, you cannot normally rescind a builder’s upgrade requisition order on your particular home at a later date. And if you do cancel an upgrade order, there might be a punitive cancellation charge and/or a change-order fee, assuming it’s even possible to make a change at all. This is predicable, since upgraded materials and options are ordered from outside vendors and suppliers and, as a result, are hard costs that must be absorbed and paid for by somebody. That somebody is usually the builder, and since the builder has receipt of your deposit in escrow, don’t expect to get it back because of your bad. So it really is a “point of no return” to a certain extent—once the check has been written, you’ve signed at the dotted line, and the design upgrades have been purchased.
If given incentives from the builder, whether it be design or closing costs incentives, be certain to use them. Remember, use them or lose them. There have been times when I’ve spent as little as several hundred dollars on upgrades, simply because the builder provided such a nice product that upgrades weren’t necessarily required. And in the event that the builder may have given $5,000 to $10,000 as built‑in upgrades, I’ve made certain that I used them all. So remember, use them or lose them in terms of incentives that are offered from the developer. They will add value to your home and increase your profit.
And lastly, limit your design upgrade areas, which is the title of this section, to “high impact areas,” which is usually the kitchen or the bathroom. In fact, I would say just about always that the kitchen or bathroom should continuously be a focus of interest. These are high-impact areas, meaning that when entering a home, a consumer will note those areas as the most likely part of the home they would like to cosmetically enhance. As a prudent investor, limit these types of expenditures from $5,000 to $10,000 in total for either the kitchen and/or bathroom. Although subjectively it is in the eye of the beholder as to which areas should be upgraded, spend nothing if the home is sufficiently decked out with amenities and presents a shelf‑ready look that is appealing to the average homebuyer. The rule of thumb that I use is that design upgrades ideally should not exceed 2 percent to 4 percent of the purchase price. As an example, a $250,000 base price flip should not exceed $5,000 to $10,000 in design upgrades. Going beyond that will substantially reduce your net return 20 percent to 50 percent. If for example you expected to clear $30,000 in net profit from a $250,000 flip you bought, that $30,000 may be reduced down to $20,000, if instead of spending $5,000 on upgrades, which is typically a sufficient amount, you went and spent $15,000 in upgrades.
So keep in mind, there is a diminishing point of return. And also keep in mind to limit your scope of design enhancements to high-impact areas.