The pros and cons of updates
When it comes to home choice, the primary question an investor should ask in an acquisition is whether or not the option selected will contribute to the home’s salability, relative to actual cost. Obviously, there is a point of diminishing returns if one builds a Taj Mahal on a land of sprawling houses. Despite the temptation to go all out and decorate the venue right down to the tee, resist the urge. Doing so will only reduce your return. This is particularly important given the fact that since this is an investment, an investment of unknown value, it is unwise to risk some of the potential gain by purchasing unnecessary, non-critical design upgrades.
Most of the time, home builders are aware of this vulnerability. This is truer than ever for investors, for whom they will provide a plethora of options and upgrades that are heavily dialed in. This type of financial exploitation provides an income stream that is indispensable to many homebuilders, like KB Home, who are known for their exuberant cost options and upgrades. This system is so elaborate that its design department is an entire corporation of its own, known as KB Home Studio, and rivals that of most high-end design centers. Not only are these independent profit centers, KB Home has a separate business unit with SVPs, AVPs, regional heads, etc., to take care of this organizational monster. The best thing about this device is that it offers a lot of design enhancements and options that are truly top notch. The only problem is that you usually have to pay through the nose to get these wonderful amenities.
To tell an anecdote, the first time I went through a KB Home Studio it was a baptism of fire. I spent over eight hours in the design center, spread over two days. At over $35,000 worth of upgrades, I figured it would cost me about $4,300 an hour to shop at their design center. You can see why he was happy to get out of there. Also note that you may be required to pay a fraction of the upgrade costs in the form of a deposit shortly after selection. This is almost a certainty and an industry standard. On average, the deposit amount ranges from 25 to 50 percent and is generally non-refundable. The consequence of this deposit requirement is obvious, as it makes it more difficult, especially as an investor, to exit a transaction.
Although the latter can be seen in a pure convenience factor, it’s hard not to like that a home builder can offer you so many options. Having the “convenience factor” available is great; however, it becomes a trapping issue when the builder offers a plain vanilla box with no or few upgrades. In these cases, sometimes builders will just go to “code” – that is, they will only provide what is necessary to get the property approved by the local housing or building and safety department, at the city or county level. a certificate of occupancy. This, for example, may mean no rain gutters, no front or rear landscaping, unfinished garages, which typically consist of drywall with a primer coat, or an unfinished garage consisting of the latter but with exposed 2×4 joists, sheetrock, chicken wire and black installation cover. Other more obvious “standards” include all vinyl flooring and small white 4×4 tile for the kitchen countertops, or cheap laminate for that matter. To top it all off, in terms of complete ugliness, you might get the builders special quarter-inch banded marble countertops in the bathroom.
There’s a reason even the home design centers at Home Depot or Lowe’s highlight these conveniences, and that’s because they’re cheap and no one really wants them. Consequently, many home builders offer the standards to get the most money possible from each house they build. As a result, a new owner and/or investor is essentially forced to purchase options and various upgrades to avoid making the home look like a plain Jane. Having too much of a plain Jane can actually hurt a home’s value. As an investor, it’s up to you to strike a balance without spending too much on a new tract change. That’s the nature of making a business decision: you have to use your judgement. I have seen some homes that were literally destroyed from the inside out due to the extreme lack of curb appeal that permeated the home as a result of the lack of improvements. As an example, it’s probably a good idea to spend an extra $4,000 to $6,000 on upgraded flooring and kitchen countertops. Most rugs, even without stain guard, should be adequate for most homes. Don’t be pressured to upgrade your rug with thicker padding. Just go with the quarter-inch standard, as most builders will try to get an extra $700 to $1,200, if not more, added to the cost of the home just to improve the infill.