New machine learning algorithm calculates home remodeling ROI

 

When it comes to home improvements, understanding the return on your investment can be complicated. The US home improvement and repair industry makes up 1.9 percent of US economic activity, and Americans spent a whopping $340 billion on their homes in 2015 – but knowing how much of that money they’ll get back out of their homes is a trickier number to pin down. At Kukun, we set out on a mission to understand ROI, and then to make what we learned accessible to everyone who uses our tools.

Why do you care about ROI?

Maybe you’re ready to stick a for-sale sign in your front yard, but need to fix a few things first so you can get as much for your home as possible. Or maybe you’re not thinking of selling, but are pondering those custom cabinets you’ve been dreaming about for years. Whatever your renovation situation, understanding how a project will alter the value of your home is a valuable thing to know. It can help you decide between projects (redo the half bathroom downstairs or the master bedroom?) and make informed decisions.

“If you’re going to keep [your home] and live there forever, have fun. But stay informed when you spend and may sell,” said Joe Rountree, a real estate appraiser who has been working in the Boise, Idaho, area for more than a decade and flipped five houses for a profit in the span of one year. When renovating, it’s important to make your space feel more like you, but keep in mind that the more you personalize a space, the less likely it is to appeal to a broad range of potential buyers when you want to sell. “It’s a balance,” Roundtree said.

Geographic and economic drivers of ROI

At Kukun, we know that a seemingly infinite number of things factor into ROI. That’s why we collaborated with local renovation professionals and studied 68 major metropolitan areas. We looked at how home values change over time, and what influences those changes in value. The data yielded some surprising findings, which will be shared this June 2017. We also found that many aspects of the local area, which are frequently taken into consideration when purchasing a home, also come into play with ROI. These include:

  • The quality of schools in the district.
  • The proximity to key services, such as hospitals, restaurants and malls.
  • The number of employers and well-paying jobs in the area.
  • The city or county’s future plans. For example, are there efforts to attract new businesses that will bring jobs? If new waves of people are moving to town, there will be increased demand for real estate, and therefore an increase in prices and the value of homes undergoing improvements.
  • The historical trends of local real estate values.
  • The overall health of the housing market in the region.
  • The crime rates in the area.
  • Where a house is located – this is one of the most important variables that directly influences its value.
  • The type of the property (single family home, condo, apartment, etc.).

Common anecdotal drivers of ROI

Many direct, project-specific factors play a part in home improvement ROI. These include:

  • Project type: How often does your project factor into daily life? Kitchens and bathrooms are often great investments because they are used so frequently. However, this is only the case if the renovations done in a fairly generic way – not everyone will love the elaborate mosaic tile backsplash that you do. Although the projected ROI of a project can change each year, minor and mid-level kitchen and bathroom remodels remain among the top projects with a consistent, long-term ROI. As a general rule, makeovers do best (not overhauls) and visible projects (think windows) do extremely well, compared to changing your electrical panel for example.

Watch: Real Estate Pro Shares Five Home Improvement Projects With the Best ROI

  • Finish level of the project: This is where the balancing act comes in. You may not get the best value for your money out of top-of-the-line finishes, but going for the absolute cheapest option may not add as much value to your home as something a little nicer. Kukun’s tools offer three finish level options – Good, Better and Best – so users can explore their options. “Budget a remodel between 10 and 20 percent of what your home is worth currently,” Roundtree said. “Do your research. A $30,000 kitchen remodel in a $500,000 home will have a different ROI than that same level of remodel in a [much less expensive] townhome.”
  • Visibility: This is where the wow factor comes into play. Think like a potential buyer seeing your home for the first time. Curb appeal (front doors, nice roofs, siding) makes a big impact. Foyers and windows also help to create a rich first impression, and a good cleaning and decluttering go a long way, too.
  • Project cost in your area: Kukun is often asked why we require an address to generate a cost or ROI estimate. This is because the cost of a project – including contractor fees, etc. – varies widely depending on your geographic area. More importantly, the Kukun machine learning algorithm searches for permits taken on properties nearby, and homes that have been sold twice within the last five to 10 years. In order to give you the most accurate ROI, we need to go down to your block.

THE COST OF A 140-SQUARE-FOOT KITCHEN REMODEL WITH THE SAME FINISHES VARIES GREATLY BY LOCATION.

After taking all these factors into account, collecting a huge amount of data and crunching numbers, we created the algorithm for our Projected Home Value tool. Projected Home Value is the first tool of its kind – it uses this unique data set to estimate how different home improvement projects will change the value of a home, so homeowners can make smart remodeling decisions. Throughout the process, we have tried to ensure that the software aligns with the general intuitions and perceptions about renovation projects. For example, the addition of a pool usually gives little ROI in comparison to adding a bedroom. Because of our attention to detail and the care we took in developing this algorithm, we can say that the figures our customers receive after using our tools are at least 80 percent accurate.

Using Kukun’s Projected Home Value tool

Discovering how that project you’ve been considering will alter the value of your home starts with creating a plan. With Kukun’s Personalized Estimate feature, you can select from 29 project types and choose the finish level of the different elements of that project (perhaps you opt for top-of-the-line flooring, but go with mid-level cabinets). Then you enter your address, and we’ll tell you what your project will cost. Next, click the Projected Home Value button and fill out the short form.

Voilà – your project’s estimated equity gain will display next to its cost! From there, you can share your project with friends and renovation professionals, and start getting bids with our RFQ template, Quote Request.

Whether you’re looking to sell your home or just want to know how to make the most of your remodeling budget, understanding ROI is essential. Kukun’s Personalized Estimate and Projected Home Value tools make it easy to understand your options, see their effect on the value of your home and make informed remodeling decisions.

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