What is Sweat Equity in Real Estate?

What is Sweat Equity in Real Estate?

Posted on Aug 12, 2022

If you’re planning to sell your home one day, you’ve probably come across the term “sweat equity.” Exactly what is sweat equity in real estate? Sweat equity refers to both the materials and labor that the homeowner has contributed to a property, in order to improve it and increase its worth.

While some homeowners may prefer to outsource their labor needs to contractors, others want to learn how to properly paint a room - and do it themselves in order to give their home a fresh, updated look.

If you’re wondering about how sweat equity will affect the selling price of your home - and how to calculate it - here’s what you need to know.

How does sweat equity work in real estate?

It’s easiest to understand how sweat equity works with concrete examples. Say that you buy a fixer-upper home. You want to renovate it so that when it comes time to sell, you not only profit from the home’s appreciated value - you also profit from the labor and time you’ve put into it (sweat equity).

Let’s say you add a wooden deck yourself. According to Homewyse.com’s installation calculator, a 320 square foot deck would normally cost between $4,831 and $6,383 to install. 

However, if we remove the cost of labor from the equation using the same calculator, homeowners need to spend only $2,896 - $4,038 (the cost of materials). 

According to Master Decks, a well-maintained wooden deck adds about $10,000 to the value of a home.

Not only will your home sell for more, but by constructing the deck yourself, you're essentially pocketing the cost of labor.

"It can actually be  a lot easier than you think. You don’t necessarily have to do major projects that cost you and arm and a leg (and a lot of sweat). It can be little things around the house that might make a huge difference!" explains Jacksonville-based listing agent Davis Doolittle.

How do you calculate sweat equity in your home?

People trying to calculate sweat equity often assume that 

(the cost quoted by contractor) - (cost it took to do the project yourself) = additional money the home will sell for.

However, this is usually not the case - and is worth keeping in mind if you want to focus on high-profit projects. As the Cost v. Value report indicates, the price quoted by a contractor is rarely the recouped value of a project. It's simply the price of labor and materials. 

Let’s say, for example, that you replace your entry door with a new steel door yourself. The estimated cost is $2,206, while the value it adds to the home’s selling price is $1,409 (on average). In other words, you would need to save at least $800 on labor just to break even - let alone turn a profit. 

Some guides will tell you to simply add the cost of materials you spent on the project to your estimated sale price, but this number could be too low or too high. It’s nearly impossible to get an exact number for how much value your renovations add to the home, because ultimately it's also subjective - some homeowners will value certain features more than others, and some improvements can be more valuable in a high-inventory buyer's market (where you're competing to get your home seen) than a low-inventory seller's market (when buyers have few other choices other than your home).

To create an estimate for the value of your sweat equity, look up the individual recouped value of each project (minus labor, since you didn’t have to pay for that) and add it to the price you bought your home for (and add on 4% per year you’ve owned it - to account for average appreciation).

In other words,

 (estimated selling price - appreciation - cost of materials) = sweat equity

Alternatively, if you’re ready or nearly ready to sell the house, you could meet with a local real estate agent - they should be able to give you a better estimate for what your home will sell for based on their extensive experience. From that, it’s fairly easy to calculate how much sweat equity you were able to build up.

Talk to a listing agent

What are the best sweat equity projects to take on?

The best projects to take on are usually the ones that require minimal education and personal investment of money. While re-doing your entire bathroom can add serious value to your home, there's also a lot that can go wrong - and mistakes can be very costly. By contrast, changing out cabinet hardware can be done after watching a Youtube video and if you mess it up somehow, the stakes are fairly low - you haven't lost much money or done any real damage. 

Here are some of the best projects to take on without spending a lot of money or necessitating a ton of know-how beyond Youtube instructional videos.

  • Update your fixtures (lights, outlet covers, switch plates, curtain rods, etc). A little can go a long way here and upgrading to metal fixtures or even spray painting existing pieces to an even color can add an impression of luxury to a room.
  • Window treatments. Wooden blinds and drapes help to frame a room and go much further in adding value than cheap plastic blinds.
  • Replacing your garage door. Garage door replacements have some of the highest return on investment (ROI) of any major renovation project! Not only will it look great - you'll improve your curb appeal, and recoup most of your money back when you go to sell. 
  • Paint your front door. You'd be surprised at how much a freshly-painted front door can update your home's exterior. Data crunching of thousands of Zillow listings has uncovered that "simply painting your door black, on average, increased the price of a typical U.S. home by 2.9 percent."
  • Install crown moulding. Crown moulding adds a nice finishing touch to rooms. Because this decorative element typically lines the ceiling, it tends to draw the eye upward - creating the illusion of a larger, more open room.

"From experience, a simple paint job (interior or exterior) or a refresh on landscaping can make all the difference in the world should you want some quick equity. Even repainting kitchen cabinets! Simple things," notes Doolittle.


Sweat equity taxation

Don't forget: if sweat equity improvements increase the value of your home, they also increase the property taxes you’re required to pay on that home. One benefit of doing home renovations yourself (provided that you aren’t required to get a permit and/or hire contractors, which will be noted by the city) is that your improvements may not be noticed by the county tax assessor until you receive your home’s appraisal when you go to sell it.

What should home sellers be wary of when it comes to sweat equity?

Permitted Work

Permits are one major concern when it comes to sprucing up your home. Don't assume that just because someone successfully re-did their electrical outlets on Tiktok or HGTV that you can, too. 

Always double check with your local building department as to whether a permit is required to do work on certain parts of your home. Generally speaking, permits are often (though not always) required for electrical, plumbing, and structural work.

It's important to keep within legal regulations when it comes to updating your home, because if you don't, this will likely come up when you sell the home and have to disclose your un-permited work (or they're uncovered by the inspector). Then what will happen is that you'll likely have to pay for the fixes all over again - or reduce the home's purchase price.

Fixer Upper vs. Turnkey

An important thing to keep in mind is that buyers are typically looking for either "fixer uppers" (in order to save money) or "turn key homes" (in order to have a quick, easy move) - they're less likely to be looking for something in the middle which would cost more, yet still require them to do renovations.

What this means: If you update the kitchen but your bathroom is still badly outdated, buyers may still see your overall house as a “project” that should be discounted rather than a turn-key property. In cases like this, you might be better off taking care of the most important updates in each room, rather than completely re-doing one room while leaving the other as-is.

Future Comps

Something else you should keep in mind is future comps.

"You don’t want to over-improve the house! Make sure you actually check out comparable homes selling in your neighborhood to make sure you aren’t pricing yourself out of the market," explains Doolittle. 

Basically, at some point you may improve your home to the point where the price per square footage is very high for the hyper-local neighborhood area. When that happens, your home may take longer to sell when it goes to market - as homebuyers may see your lower-priced neighbors as a relative "deal."

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