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This question is about crunching numbers under certain assumptions.

Let's say my house of 1,000 square feet was purchased for $250/sqft for $250,000. Homes in my street and neighborhood go on average $225/sqft. So if I add 1,000 sqft to my house, I should be able to sell 2,000 square feet @ $225/sqft = $450,000. This means that I could spend $200,000 on the remodel?

Well that part I'm pretty sure is correct. What I want to know is: Does there exist a more precise formula people use to calculate things like this? Maybe that include interest, fees, appreciation?

UPDATE: Okay, I've done some more math and think I've got something. Remember, we're just going to operate under some assumptions here. I'm trying to figure out the 10-year outlook. So Assuming I can get $225/sqft now, that's $450,000. Let's assume that homes appreciate at 3% (it's actually higher now) that gives makes me a potential home sale of ~550k in 10 years. Then I computed what would be left on the balance in 10 years and subtracted that ~200k and I'm left with ~350k of future dollars to remodel. Today thats ~260k assuming 3% inflation. Then I just have to figure out how much of the costs I want to recover. For example, I will have spent ~100k in interest in 10 years so I'd like to just spend ~160k on the remodel to recoup those costs. It's not perfect but I think I'm getting somewhere.

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    Not all remodeling adds value to a house. You might actually lose money on some remodels. Also, you are more talking about adding an addition I think? – Ross Dec 11 '15 at 18:08
  • Yes, an addition. For the purposes of this question, I'd like to assume I'll get $225/sqft for a 2,000 sqft house. I realize that is not a guarantee. I'm more interested in computing net gains accurately (i.e., are there formulas that take into account appreciation, taxes, fees, interest, and so on). – Jeff Dec 11 '15 at 18:22
  • Popular opinion (just google hard to sell most expensive house in neighborhood) is that it's not a good idea to have the most expensive house or a house that's overbuilt. If the area is really hot, that is, people are clamoring to buy, then it might work. – mkennedy Dec 11 '15 at 19:38
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    Real estate valuation is a tricky matter. You're unlikely to find a formula that you could rely on to give a really accurate valuation just based on general numbers like square footage. – BrenBarn Dec 11 '15 at 20:15
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    Same reason successful traders at Goldman Sachs don't let you look over their shoulder :) Making financial models takes time and assumptions about the investments themselves - location, size, year, school district. Since real estate are illiquid assets as well it makes it even harder to have set formulas to calculate such - i'll see if I have anything close in any of my real estate investment books but no promises. – Ross Dec 11 '15 at 20:51
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You could certainly ask the town how much your appraisal and taxes are likely to go up, based on a set of plans you give them and your current plans and appraisal. Since appraisal is based on comparing your property with "equivalent" properties which have sold recently, that's as good an estimate as you're likely to get. The real answer isn't available until you find out what folks are willing to buy your place for.

As others have said, most renovations/additions cost more than they return when the house is sold. However, they also "pay" in making the house better fit your needs while you're still living in it, and arguably thst's the criterion you should really be using for the decision -- compare it to the cost of finding, buying, and moving to a house which has the additional space/feature/whatever.

The exception would be if something is so outdated that you know it's actively dragging the value of the house down. But beware; tastes change and something that is out of fashion now may be "wonderfully retro" by the time you sell. Getting rid of a 1945 heating system is almost certainly a win both now and for resale; getting rid of 1945 kitchen cabinetry might not be, if nothing is wrong with it.

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Hosing prices don't follow a pattern over a 10 year period.

For example:

  • 1992 buy townhouse for X, put down 20% to avoid PMI
  • 1999 sell the townhouse for x - 7K. with closing costs and real estate fees the check received at closing was half the original down payment.
  • 2002 people who bought in 1999 sell house for 1.5X
  • 2005 the next people sell for 2X
  • 2008 bank sells for 1.2 X

You have to realize that anything you do to remodel or expand may price you out of the market. You may make a choice that costs you money to sell. Do it because you needed it, and it is a better option then moving to get what you need.

Houses don't sell based on average cost per square foot. Two houses with the exact same square footage in the same part of town will differ based on:

  • interior layout,
  • options and materials,
  • size of lot,
  • view: looking at a park vs looking at a parking lot
  • location (being on a busy street lowers the value, being on dead end raises the value)
  • school boundary

Some of these are mathematical, others depend on the whim of the potential buyer, others depend on how you compare with the other houses on the market.

Over time they can change. If the great school drops in quality so will the housing prices. If the subway is delayed for a decade or they shift the location to the other side of the highway; all your plans will be for naught.

choices you make today will determine what you can reasonably get in the future. Decide what you need and determine the best option based on all your requirements.

  • Like I said in my post, This question is about crunching numbers under certain assumptions. Maybe I should remove this question... The reason it's difficult to do the relative home comparison is because my neighborhood is unique and quite old. It's not row after row of suburban houses. There are 100 yr old craftsmans next to modern houses next to dutch colonial revivals. Demand is huge and houses go as soon as they hit the market. Like I said, I think a very safe estimate is $225/sqft. Many houses go for over $300. So I'm trying to figure out my what I can spend before I talk to anyone. – Jeff Dec 12 '15 at 12:36
  • But they don't sell for $300 a square foot. That house sells for $X total. the price is based on size, options, materials, location. Even one block can change the price by $50K. – mhoran_psprep Dec 12 '15 at 12:43
  • On my street houses go for average $225/sqft. I looked it up. They are typically 4 bed/2.5 bath with updated kitchens. I would make my house the same as theirs. Can we please move past this? – Jeff Dec 13 '15 at 3:12

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