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It's a Seller's Market. Should You Bother With Renovations Before Listing?

Jan 10, 2021 by Maurie Backman
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In today's housing market, it's clear that sellers have a distinct advantage. Mortgage rates have fallen to historic lows, driving a surge in buyer demand. But that's not the only reason sellers are getting away with listing their homes at higher prices: Inventory is also at a record low, which means sellers aren't having much trouble getting buyers to bite.

As of the end of November 2020, there were only 1.28 million homes available for sale nationally, a 22% decline from a year prior and a mere 2.3-month supply of homes. That's the lowest inventory count on record since 1982, reports the National Association of Realtors. It's also roughly half the amount of inventory needed to equalize the housing market so sellers don't have such a supreme upper hand.

Not shockingly, an uptick in buyer demand has driven home prices up. In November, the median price of a home sold was $310,800, which represents a 14.6% increase from a year prior.

If you're looking to sell a home today, whether it's a primary residence or a vacation property, you may be wondering whether it pays to make renovations given buyer demand. Here's what you need to know.

Focus on cosmetic touch-ups and actual problems

Though some home renovations offer a better return on investment than others, even the most cost-effective improvements rarely allow sellers to recoup their entire outlay. In fact, according to Remodeling Magazine's 2020 Cost vs. Value Report, manufactured stone veneer offers the highest return on investment of all home projects with a cost recovery of 95.6%. Garage door replacement, its runner-up, comes with a cost recovery of 94.5%. From there, however, resale value tends to decline. Third on the list is a minor midrange kitchen remodel, the average cost recovery of which is just 77.6%.

For this reason, sinking money into major renovations doesn't make sense in today's housing market. Given the number of properties that have recently been subject to bidding wars (54.5% of offers in August, according to Redfin (NASDAQ: RDFN)), the likelihood of you finding a buyer by selling an as-is home is high.

That said, it does pay to invest in minor touch-ups that don't cost a lot and add loads of aesthetic appeal. Fresh paint, steamed carpets, and clean landscaping can all go a long way toward drawing in buyers and driving prices up during a bidding war.

Furthermore, if there are known issues with your home -- a failing heating system, faulty plumbing, or an electrical setup no longer up to code -- it pays to address those problems before listing. While some buyers are waiving home inspection contingencies in their real estate contacts out of desperation to get their offers accepted, many won't resort to that extreme. And as a seller, you don't want to have deals fall through when inspections unearth a host of issues that send buyers running.

The Millionacres bottom line

But other than minor cosmetic fixes and actual repairs, you're better off not spending much money to improve your home before selling, given today's market conditions. While housing inventory could open up as 2021 rolls along, based on current supply, you don't have to try very hard to attract buyers. The fact you have an available home in the first place already gives you an edge.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin and recommends the following options: short February 2021 $40 puts on Redfin. The Motley Fool has a disclosure policy.