Repairs and add-ons are sometimes a wise investment

Carla Bouchard Real estate tips.

To repair or not repair? To add on or not add on? Those are the questions. But in general, repairing a serious flaw in your house definitely should boost its value. But determining how much bang for your buck you'll get could depend on what you paid for the house.

If you paid full market value for it to begin with, then you're less likely to see all the money you invested when you sell. However, if you paid less than the market value, then you could be ahead when you sell. This is due to the fact that your repairs will have the potential of dramatically enhancing the quality of the home, elevating it from a problem property to one that can be marketed to a bigger pool of buyers -- including those who don't want to invest time and money in an overhaul.

To be sure, the classic 'fixer-uppers' can be a great source of profit for savvy real-estate investors, or for those with the time and fortitude to fix them up. But how do you decide if you'll be ahead or not? Well, it's fairly easy to figure out it if it's worth buying a house that needs work.

Let's say you're planning on buying a home not in great shape for $100,000, and a contractor tells you it needs $50,000 in repairs and upgrades to make it comparable to other homes in the community. Now add in your other expenses such as your mortgage, closing costs, and real-estate agent fees, as well as holding costs such as utilities, insurance and mortgage interest, left over property taxes etc. Next talk to a real estate professional to get a feel for what comparable properties are selling for in the neighbourhood. If they're selling at prices that are significantly higher than the bottom-line cost of your home once all the expenses and repairs are added in, you know you'll be ahead of the game.

However, whether doing repairs or thinking of adding a new room, there are a few things you have to watch out for -- make sure you're comparing apples to apples, or at least siding to siding.

Be careful that you use the same materials and that you build to the same quality standards as the rest of the house. If you don't, the room will stick out like a sore thumb and bring down the overall value of the home. An unsightly add-on might also create troubles for you with the local authorities, especially if any part of the house doesn't pass muster with housing officials.

On the opposite end of the scale, you may not want to make too many improvements to the state that your home is now if the result is the biggest home on the block. Many buyers are reluctant to buy the largest house in a neighbourhood (they feel it will be hard to get full value for it on selling), so if you make too many improvements, it could actually hurt your home's resale value.

If you're not an investor, and you plan to live in the house a long time, the equation changes somewhat. In that scenario, you're not looking to make a quick profit on the house but want to enjoy the benefits of the upgrade. Hence, it's less critical to make sure your improvements will earn back their total cost. And for some, an addition is an excellent alternative to moving. It can breathe new life into your old home.

Even so, the same principles apply: If you didn't get a discount on the house when you bought it, it's going to be harder to make a good return on your repairs when you sell.Whatever you do, you shouldn't just let the unsightly or problematic part of the house deteriorate. In some cases, problems with a house can be so large that they can seriously jeopardize your ability to sell the home.

As an example, the following could be a scenario. A home is located in a very popular subdivision but is a hard sell. Though the home is quite large with a full granny-suite to a walk-out basement and a living room ceiling that travelled up for two floors, it suffers from pockets of dry-rot on the exterior cedar siding. Because the rot was let go and not repaired at the time, it is hard for building inspectors to say just how much damage has been done over the years.

In the end, it is on the market for more than a year, and sells for almost 30 per cent less than the original asking price.

However, the seller's loss is the buyer's gain. That thirty per cent savings is pumped back into the house by the new owners, and now their house can sell for much more than what they've put into it.

So whether you want to add on to your house for profit, or simply for your own enjoyment, do the math and see what's right for you.