Real Estate Agents Don’t Understand Finance

by Ron Haynes

Only in the crazy world of real estate can you hear something like:

“Your return on investment for a kitchen remodel is 100 percent.”

“Your ROI on a new deck or patio is 80 percent.”

“New granite counter-tops will return 100 percent.”

“Invest that $40,000 into a new bedroom and bathroom addition and you can expect a 90 percent return.”

Here’s a news flash for the real estate agents out there: Return On Investment (ROI) isn’t measured by the return OF your money, but the return ON your money. It’s how much MORE than you invested as a percentage of WHAT you invested.

ROI

For example: If you decide that a $40,000 new bedroom and bathroom addition is critical to the viability of your current home, a 90 percent ROI would mean that your home increased in value to the tune of $76,000, not $36,000.

In this case you received “back” $36,000 of the $40,000 you “invested.” To me, that isn’t an investment at all. Would you call it a “return” even if your investment was valued at the same amount? Real estate agents would call that a “100 percent” return!

Imagine investing $40,000 into a mutual fund and at the end of one year it was worth only $36,000. The real estate agents say, “ Congratulations! You’ll get a 90 percent return when you sell!” The financial guys say you lost 10 percent.

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If an upgrade will lose money, don’t do it.

That is, if money is your only reason for doing it in the first place. Your upgrade may be something that your family needs. It may be something that improves your life or something that allows you to spend more time with your kids. It may be necessary from a maintenance standpoint (the floor is in bad shape or the cabinets are deteriorating). In those cases, it becomes much harder to quantify and only you can decide if the upgrade is worth it.

Don’t fall for the real estate agent’s definition of return on investment. You know better!

About the author

Ron Haynes has written 1000 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


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{ 6 comments }

Joseph @ DebitversusCredit

Thank you for this post! You’re so right! In the age of HGTV it’s so easy to get caught up thinking that doing this and that to your house will give you a huge return on your money when you finally sell your home. In reality you’re lucky to break even on what you spent. Fantastic post!

Credit Card Chaser

Haha so true – it is quite funny to see real estate agents talking about ROI on TV when they likely struggled with even the basic math that is required to get a real estate license (nothing against the Realtors out there with above average financial knowledge but being a Realtor is certainly not an indicator of financial knowledge).

ctreit

I would also suggest that many real estate agents don’t understand real estate, either. They are in the business of earning commissions for themselves, which does not necessarily require a good understanding of the real estate market. How many real estate agents do you think had an idea that the bubble was coming to an end a couple years ago? Even the head economist of the National Association of Realtors was so blinded by his business that he thought real estate prices would keep going higher.

Ron

Excellent point, though more than just Realtors missed that one.

Kent Hu

Great post Ron – it’s just simple MATH, any relator or CPA should understand it ;-)

Vernon | Fiberglass Exterior Doors

I’ve been watching the real estate industry pretty closely these days (in the business), and I’ve got to say that there’s a lot of financial misconceptions out there about what’s possible or not with respect to these investments. Mathematically speaking, the ROI has got to be one of the biggest trip-ups for many folks! Not only that, most folks don’t even have a realistic view of ROI. Once I read this article that a woman bought a house, did some wall papering and fixing-up over a week, and told the newspaper interviewer that she thinks it’ll appraise for an increase in $100K! I mean, ROI or not, this sounded outlandish!

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