Discuss WHY IKEA? Because resale DEMANDS it! on IKEAFANS.com. We're Personalizing the IKEA Experience. WHY IKEA? Because resale DEMANDS it! - Are you new to the IKEA concept? Want to find out what the excitement is all about? Do you have an IKEA Spotting to report? Read on!.
I spend a lot of time thinking about my finances- it's true. Regardless if you do or not, I'd like to share my thoughts about why the current housing market makes an IKEA kitchen a better move than ever before.
Everyone contemplating a remodel is or should be familiar with the resale value of typical home renovations, with kitchens, bathroom, exterior siding renovations returning some percentage (50-85%) of the investment. This tool is handy for understanding these guidelines:
And of course, we are all familiar with the unimpeachable rule of investing: buy low, sell high. There are 2 ways to do this with housing:
Buy and hold, with housing naturally increasing with value over time
Buy and improve, with improvements increasing the value
In both cases we are talking about the margin- the difference between what you paid, with expenses such as interest payments, maintenance and improvements, and what you received at sale. The first is time value and the second is added value.
Wait a minute, the US housing market is in the tank! Many people paid more for their houses than they could now turn around and sell them for; and even if they did not pay too much, they will have to wait much longer for that home to appreciate significantly. So, it's time value that's in the tank.
Which leaves you with adding value, which provides you with two great outcomes: 1) enjoyment of the asset while you live there 2) the only way you have of adding to the value of your home.
In the current market, buyers are looking for deals, which means that they want discounts on value- they want to cut into your margin. So, falling home prices require that home improvements must be economical- you must maintain the margin in your home improvements, despite buyers taking discounts on it. How do you do that??
DIY is an outstanding way of building more margin into your home improvement investment.
A mid-level kitchen renovation is expected by the market to cost $20k. That means that your kitchen looks like others that cost about $20k. This is how real estate valuation works- comparables, not actual cost. Labor costs are 40% of that $20k (probably higher than that, but let's be conservative). Let's say you get a generous 80% of that $20k investment back in resale, so $16k. You lost $4k.
If you eliminate the $8k (40%) of labor costs, so your $20k kitchen cost $12k and you get $16k out of it. You just made $4k.
So that's DIY. What if I don't have the skills or the time to DIY?? What about IKEA?
My IKEA kitchen reduced the cost of my renovation by half, with some labor hired out. If you poll the people on this site, you'd find similar numbers.
In this example, I'll still use the midlevel kitchen remodel which looks like others costing $20k, and which you can expect a resale value of $16k out of. Remember this is how real estate valuation works- comparables, not actual cost. I'm still assuming that the materials make up $16k of the $20k expense as in the original example.
But, with IKEA, this kitchen will cost you $8k, or 50% less than the $16k of materials in the first example. Remember, there is $4k on the table for labor which you can retain by doing it yourself (the work is the same regardless of what kitchen you choose). So, if you hire someone to do your IKEA kitchen, you will pay $12k ($8k materials + $4k labor=$12k). Remember, the $16k resale value is for kitchens that look like those which cost $20k. In this example, an IKEA kitchen installed by a professional nets you a margin of $4k.
Let's go over that again: Build in a profit margin of $4k (IKEA with an installer) OR build in an upfront loss of $4k (other cabinets with an installer).
There's another issue...where would the $20k come from? Most of us would have to take a loan. That'll cost you 7.5% annually (I'm not going to go into deductibility of home improvement loans- if you can figure out that benefit to yourself, you don't need to read this). Let's say you live in the house 3 years, that's an additional $4,500 in interest costs ($1,500 x 3). The $20k kitchen now costs $24,500- you've now built in a loss of $8,500.00 ($24,500 cost - $16,000 resale value).
A $12k loan at the same APR will cost you $2,812 over three years- so that $12k IKEA kitchen professionally installed will cost $14,812- you've STILL built in a gain of $1,188, even if you finance (at a reasonable rate- if you finance on a credit card at 24%...well, that'd cost you $8,640 in financing over three years, or $20,640, which builds in a loss of $4,640- STILL 46% BETTER THAN THE ORIGINAL ASSUMPTION of a loss of $8,500 @7.5%!).
And of course, DIY with IKEA means even more margin. So, let your buyer think they got the better of you at closing- it won't cost you ANYTHING to let them think they won.
Kuddos on your post. Exactly what hubs and I did when we decided to renovate my Mom's house namely the kitchen before we sold it - originally we were told that we would get around 234,000 for it. I couldnt have that - was a nice out-dated well built townhome - my Dad would have rolled in his grave if he knew I would be giving it away at that price.
What did we do - we spoke to several realtors who said we would never recoup our expenses to reno it - one guy even told me that too many people watch the show "flip that house" - It took a while to find a realtor who was as excited at the opportunity as we were - he initally told us we could get 270,00 for it if we put a coat of paint on all the walls - and renovated the kitchen....
What did we do - had the house painted top to bottom in nice warm taupes. Gutted the kitchen and went with ikea cabs and found a great deal on granite counters. Great deal on the faucet as well. We replaced all the bathroom vanities with new ones from Costco with granite tops and undermount sinks. We were very careful how we spent the money - updated all the brass and outdated light fixtures - painted the garage door and front door -and new hardware....added crown moulding - steam cleaned all the carpets and replaced the worn carpet in the master
Guess what - sold the house two days on the market - for just below asking - ta-da - what did this reno cost - 12,000 - what did we sell for - set a record on the street - got 284,500.00 only being on the market for two days.
I met the young couple who bought it - Guess what they told me - was the kitchen that they fell in love with and had to have .....
Dalbrough- A beautiful example and a beautiful kitchen!
A $12,000 renovation brought in an additional $50k in sales price- a $38k margin- well beyond anything I outlined in the original post. Those return on investment figures are conservative and "averages!"
Another aspect- the improvements were of a nature that made people excited about the space. That same townhome could have sat on the market even at a depressed price- despite only needing $12,000 in renovations to be outstanding.
That's a lesson I personally learned the hard way when we sold our first home 5 years ago. Less than $5k in additional upgrades, staging and 1st class marketing made the difference, selling the house in the winter in 2 days for $10k more than ask with 4 competing offers. The house had languished on the market FOR A YEAR before that.
So- houses are still selling. You just have to be savvy about how you make yours stand out!
That is very true Kelly. As a buyer I would not mind in the least having an IKEA kitchen instead of other poorly planned non IKEA kitchens I've been seeing. It helps your finances and it IS a selling point.
Absolutely...we spent $18K on our kitchen/dining room remodel, hired out labor to frame in and drywall the patio we enclosed to make a dining room (adding 140 SF without needing to build a whole new space since it mostly existed except for the walls and wiring) as well as labor to repair the drywall and ceiling from when we ripped out the wall and soffit. We also contracted out electricity and plumbing and the granite countertops. We DIYed everything else ourselves.
We reappraised to refinance when we finished, and in the space of 18 months in a fairly stable market our appraisal went up by nearly $75K, about $25K of that was market appreciation (12% rise in real estate prices over the year for this area) and the rest was from the remodel.
We also positioned ourselves really well for resale, because our house offers something that very few others in this area do, because of the open plan design we used. Everyone loves it and it definitely differentiates our home which, even though it is small, lives BIG. We have one of the biggest living rooms around, and the fact that it contains the kitchen as well is a plus, not a minus, at least with people we entertain.
Not a bad return for 18 months and a little sweat equity...$32K. Well, actually $30K, because we budgeted $20K and when we came in under budget we spent the rest on a cruise...
LOL...under budget really means "deferred until I find the perfect dishwasher". I budgeted for a new one and found the FX sheeting did the job for our two-year-old dishwasher, so now I'm looking at some other options for the future. I also plan on upgrading venting but it isn't a huge priority so it will wait until the el-cheapo OTR microwave dies (which according to all sources should be momentarily) and I'll replace it with the cool space-age lift-up-door LG model and vent it out the top, and maybe I'll add a 36" drawer cab where my undercounter office is and put in a built in fridge instead of the dorm fridge....can that be called "maintenance" at this point instead of capital expenditures?
Of course, I'm also thinking of a sectional which would necessitate relocating the entire entertainment wall...and rewiring...and....
Color me embarassed! That's something I would be so proud of! But, it didn't happen! Good for you!
Eva, I think you're right- these changes don't count! For example, my tile will be...decorating, as it's strictly not needed for the kitchen as I actually have a backsplash!
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