In today’s unsettled real estate market, does it make more sense for a home buyer to purchase a less expensive home that is in need of remodeling/expansion or a more expensive home that has already been remodeled? The answer may not be that easy.
For argument’s sake, I am assuming that the home buyer has approximately the same amount dedicated for a purchase as he/she does for a purchase/remodel.
Let’s look at some of the benefits of buying a home that has already been substantially expanded/remodeled but whose initial purchase price is higher:
Benefits of buying a less expensive home and doing a remodel/expansion yourself:
Additional thoughts for those who want to remodel a home:
What is the basic floor plan of the original house you intend to remodel? Some footprints lead to better additions/remodel. For example, most 50-60 year old Los Altos homes have small kitchens and baths that not only need to be remodeled, but expanded as well. Where is that space coming from? Ideally if you can find a home that has the space that can be re-utilized. Is it possible to take a 3 bedroom and expand out through the back yard and add a master suite etc.? Lot size becomes more important.
Building costs vary so you should check with several contractors. One local high-end builder won’t touch a job unless it’s at $700-1000 a square foot. I remodeled my home in 2004 for about $250/ft. Current prices should be somewhere in between.
Where do you plan to live when the work is being done? Most builders prefer that you live elsewhere so they can do their work without the homeowner always present.
How are you going to finance the remodel? A remodel takes cash, do you have it? Will you have to liquidate stock etc. to fund the remodel thereby loosing an asset (the stock) that is (presumably) making money for you. What is the opportunity cost of using your cash to fund the remodel? Buying a home that is done allows you to “finance” the “remodel costs” in the original loan.
How is your family life? Are you married? kids? Do want to keep it that way? An extended remodel takes its toll on all involved (your family as well as your builder’s). Unfortunately, I’ve seen some marriages go through the time and expense of a home remodel only to separate within a few years after the completion of work.
Recouping your costs on a remodel depends on where you feel the real estate market is going and your holding period. The longer you hold, the higher the probability the market will go up. However, the longer you hold, the higher the probability that the remodel will become old (style changes) and have less resale value.
I bought a smaller home in Los Altos in the best neighborhood I could afford. A few years later, I completed a remodel/expansion. Looking back, I wasn’t as efficient in my use of space, but I am happy with the final result. I look at it as an investment in my family’s quality of life.