Typically, when a home is sold the Buyer will borrow money to make the purchase. Since the loan is secured by collateral, the lender must make a valuation of the property to be held as collateral. The lender will hire an appraiser to estimate market value. Since most homes are purchased with a loan, the appraisal process is a driving factor for price trends in our marketplace. Even when Buyers pay cash, they typically obtain a valuation either from an appraiser or from the real estate professional who is representing them. Because of this, I use the appraisal process as a guide to advising my clients regarding which improvements will generate the desired return on investment when selling their home.
The first step is to consider the neighborhood and marketability of the homes there. Ultimately, your home will be compared to those that are similar in size, proximity, age, and condition. Appraisers use a six-tier categorization system to rate the condition of a home. When you make modifications in the form of repairs, updating, or remodeling, you are effectively changing the condition of your home and, hopefully, moving your home up to a higher condition tier where it will be compared to homes of higher quality that sell for more money.
When you are considering which modifications to do prior to a home sale, you and your real estate professional will be evaluating how much you would spend to move your home up to a higher tier and how the increase in sales price you would obtain by reaching that tier compares to the amount spent. There is no universal formula that can be applied across the board because the condition of the home at the outset must be considered in relation to the final result. Homes that start in poor condition are likely to generate a higher return on investment than those who are in a higher tier already. Also, the quality of the finishes used will affect the cost of the project and the outcome. You need to consider what finishes buyers expect to see in homes at your desired price point.
If you are making improvements in anticipation of a sale, I recommend consulting with a real estate professional to understand what is happening in your market and where your money will be best spent. I provide these consultations as a courtesy to homeowners and would be happy to meet with you if you do not already have representation.