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:
- You don’t have to do the work! Just turn the key and move in.
- Remodeling can be a costly stressful process. Buying a home that has already been remodeled eliminates these issues.
- Most everything is new and up to date. Maintenance costs (in theory) will be lower.
- You control the costs because you know exactly what your final cost for the remodeled home is…It is your purchase price.
- You also control the method of financing. If you were to remodel an older home, you would need to come up with additional cash or new financing.
Benefits of buying a less expensive home and doing a remodel/expansion yourself:
- You get exactly what you want in terms of the finished product. You get to design the home in the style and function you want (pending budget). You have total control over the end product (sort of).
- You are adding value to the property (but maybe not as much as you would hope). Click here for Remodeling Magazine’s annual report detailing the relationship between remodeling costs versus home resale value for the San Francisco region.
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.
Final Thought
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.
