Thursday, February 4, 2010

Should You Remodel or Move?

Should you remodel your home or just buy a different one?

Home remodeling is a project fraught with peril. You can easily spend more remodeling a home than it will ever be worth. And it is not hard to "over-remodel" a home so that it is at a price point beyond what the neighborhood will support.

If you find your home lacking in any way, should you remodel or move? Whether it is because the home is too small, getting old, outdated, or some other issue, chances are, in many cases, it is simpler to move to a new home than to remodel your existing one.

Why is this? The deck is stacked against you in remodeling:
1. Remodeling costs more than new construction: When remodeling a home, you not only have to build anew, but you have to tear down or modify existing structures. Trying to fit things into an existing structure can be two to three times as difficult (read: more labor) than building new. Older homes may not be square and plumb. Older lumber may even have different dimensions. Trying to fit things in without damaging existing structures takes time and effort, and thus adds to cost. It is easier to build a bathroom in a new home and to retrofit one in an older home.

2. New Construction has cost benefits: When you are building five, ten, or twenty houses, there is a savings by building in bulk. You can bring in tradesmen and they can work non-stop, installing plumbing and electric work, and with repetition, do it more quickly. You can buy parts in bulk, too. In remodeling, everything is a custom fit and a one-time deal. And you are not buying your parts in bulk, either.

3. Construction is a Hassle: The dirt, mess, and disruption from remodeling can drive you nuts. And one thing that makes it harder for the workmen is trying to remodel the home while the homeowner is still living in it. Moving out means renting a place, which means more costs.

4. Remodeling Costs More Than It Adds In Resale: Real Estate Agents like to say that adding a kitchen or bath adds the most value to a home. But what they mean is that in terms of recovered cost, you get the most of your money back. You still lose money, though. Kitchens and Baths can return 90 cents on the dollar, traditionally, while other types of remodeling or additions (bedrooms, den) may return 50 cents or less.

5. Cost Overruns and Contractor Problems: Everyone who remodels, it seems, has a remodeling horror story. Contractors walk off the job, they charge more than expected, they do shoddy work. You can expect at least some of these difficulties in any remodeling project. If you are not lucky, all of them.

So why remodel? Well, that is a good question. Many folks do it so that can remake their home the way they want it.  This is fine and all, until the day you have to sell it.  If you've remade the home in a way that is quirky or weird, good luck trying to unload it.

Builders or Developers sometimes buy distressed homes and remodel them and flip them.   How do they make a profit when you don't?  Well sometimes they don't.   But in most cases they make money by strategically buying "basket case" homes that need a total overhaul (or a lot of cosmetic work). These may be foreclosures or former rentals . Traditional home buyers and banks shy away from such uninhabitable properties.

Since Contractors are in the business, they have the contacts to make such a strategic purchase (far below market value) and then the resources (contacts, parts sources, labor, skill, experience) to remodel it economically so that it looks great to a potential buyer.   They can then sell the property at market value, or slightly above, and make money.

But you, the average homeowner, who already paid market value for his home, will not make money on remodeling.   You have to hire someone to do the work, and they will charge you retail rates for the remodeling.   And since your home was not a "bargain" distressed purchase, chances are, if you add the cost of remodeling to your purchase price, the sum will be higher than market value for your area - even if prices have gone up substantially.

Marketable improvements include upgraded kitchens and baths.  Added bedrooms can be marketable, if done in a manner that fits into the architecture of the home.  Additions that look like additions (hastily tacked on, not matching the rest of the house) may detract from market value.  Bedrooms that can only be reached by going through other bedrooms, for example, are just quirky and weird and add little value to a home, if not in fact, detract.

Of course, each case is different, so you have to "do the math" on each remodeling project. But the first step in any event is to determine the market value for your home.  Look online.  Ask a local Real Estate Agent for "comps" (comparable homes SOLD, not LISTED) to get an idea of sales prices. Then figure out if you have any headroom to do a remodel, and whether this remodel will make the home worth more and also more marketable.

If what you paid for the home, plus what you spend to remodel is more than the projected resale price on the home, your remodeling project, in addition to being costly, could make you "upside down" on the property.  And I've seen this happen to people before - and I've purchased the resultant properties at foreclosure.

If that is the case, then what should you do?

One idea is to just live with the house as it is.  If you have a functional kitchen, then use it.   If your remodeling project is just to impress the neighbors, forgetaboutit! That sort of thing is so last-decade anyway.

Here's the deal: In any neighborhood, the price spread between houses is remarkably thin. A house "all fixed up" and a "fixer upper" are not that far apart in price. A house in reasonable, livable condition is going to fetch not a lot less than the one with the new granite counter tops.

Note that there are a many types of remodeling, from the simple (!) kitchen or bath remodel, to raising the entire roof and adding a second story. Adding garages or other outbuildings are other forms of remodeling. Adding a deck or improving a deck is a popular project. There are some remodeling projects that bear special mention, however.

1. Sun Rooms: Sun Rooms bear special mention. Adding rooms to a house because you think you "need more room" is often a waste of money. For example, many people decide to add a sun room to the house. Maybe they started off with a screened-in porch, and then decide to enclose it. So they hire the sun room enclosure people to come by and they put up an aluminum sun room. The new sun room becomes the living room, and the living room becomes this empty space that you walk through to get to the sun room - an empty space that merely accumulates clutter.

And since such sun rooms are not heated or insulated, the homeowner then spends more money installing an air conditioning system or strip heaters, which are not very efficient, and as a result their utility bill skyrockets. And of course, all that sun makes it hard to watch TV, so the next thing they do is put blinds on all those giant windows to make the room darker. Pretty soon, the "sun room" is just another room in the house - a poorly insulated one at that.

And pretty soon, the homeowner thinks, "Gee, we should put a screened porch off the sun room so we can get some air!" And then the process repeats itself again, as the screened porch gets enclosed eventually. The house starts to look like one tacked-on addition after another.

Let porches be porches. Enclosing porches or trying to make living space out of them often ruins the architecture of a home and decreases its value. And the resulting rooms are often hard to heat, have cold floors, and often are maintenance nightmares. They were never intended to be living space.

2. Converting Garage Space: It is tempting for many homeowners to covert garages into living space.   This can be done in some instances without detracting from the value of the home. If the garage is built as part of the house, and is capable of being insulated and heated properly, it can add value, if the resultant space doesn't merely look like someone took the garage door off and installed a window in its place.

Garage conversions which show their roots, with cold concrete floors, dramatic step-downs, and obvious door replacements may not add much value, and in fact may detract. Most garages face the road, and thus are part of the curb view of the house. Obvious garage conversions that are apparent from the street make a house look tacked together. If you are going to go this route, spent the money and re-do the fascia of the house (re-siding, matching brickwork, or whatever) so that a glaring seam doesn't appear where the garage door once was.

3. Finished Basements: Finished basements also bear special mention. Many homeowners finish their own basements, which can be a good way of building "sweat equity" if you are handy with tools and capable of doing a good job. But poorly done self-remodeling adds little value. And quirky or oddly finished rooms add little value.

Bear in mind that unless you have a "walk-out" type basement, with window or doors that can be used as fire exits, subterranean space cannot be marketed as living space (bedrooms) and thus adds little or nothing in value to a home. Dark basement rooms add little or no value whatsoever, so don't spend a lot of money finishing them off.

Another problem with the basement remodel is flooding. Make sure that any basement space is dry and will stay dry, before you commit to finishing it off. One of my old bosses spent thousands of dollars finishing off a family room, complete with carpeting and a bar. He was so proud of it. Less than a week later, a torrential rainstorm came down, the power went out, and the sump pumps didn't work. The entire room flooded, and ended up tearing out most of what he built. It was a heartbreaking experience.

If you have a walk-out basement and plan on putting in living space (bedrooms) think about adding a bath, or at least doing the rough plumbing for one. Subterranean bedrooms with no bath add little or no value to a home, and once you've covered everything with sheet rock and carpet, it is hard to go back later and add the plumbing for a bathroom. A neighbor of ours made that mistake, spending thousands of dollars to finish a walkout basement without roughing in plumbing for a bath. With a second bath, the house would have moved into a higher price bracket, and likely recovered most, if not all, the cost of remodeling and made the house more salable.

But all that being said, before you attempt such projects, you need to ask yourself two important questions:

1. Do you really NEED a bigger house?
2. Do you really WANT a fancier house?

If so, then you should at least think about selling your existing house instead, and then buying the house you want - as opposed to remodeling. There are many advantages to this approach:

1. It is simple and fast. When the deal is closed, you move your furniture (which may have to be moved for a remodeling anyway) and within a few days or a week, you are settled.

2. No dust, no dirt, no workmen in your home for a month: Pretty self explanatory. The movers, if you use them, are gone in a day.

3. You end up with more value: If you sell strategically and buy strategically, and pay a reasonable market value for the new home, chances are, it will appreciate in value better than the remodeled older home. And yet the two may cost the about the same - the newer home may actually cost less than your remodeled older home!

4. Better financing: A new mortgage may provide you with better rates, as it is a first mortgage on your new home. But trying to get a home equity loan for a remodeling is more difficult - and the interest on such a second note is a lot higher. Yes, it might be possible to refinance once the work is done, but then you have to go through two loan closings. Plus, cash-out mortgages may not have rates as low as purchase money mortgages.

5. Strategic Buying: When you are buying a home in a neighborhood for the first time, you may be at a disadvantage, not knowing the neighborhood, or moving from out of town. But when you live in the neighborhood, you can spot the deals on the market when they appear, and jump on them.

6. Fixed and finite costs: Unlike remodeling, which can easily go over budget, selling your old house and buying a new one is a known quantity. The numbers are all there on paper, and how the house will look and the quality of the workmanship are already known.

7. Better Architecture and Curb Appeal: A larger home that is designed as a larger home looks better and fits into its neighborhood. There are no quirky add-ons or finished garages that are obvious from the road - improving curb appeal. Remodeled homes with poorly thought out additions can look awkward and be hard to sell. And well-thought out additions usually require the services of an architect, which is expensive.

8. No permiting and inspection hassles: One of the hassles not mentioned above is permiting. Getting permits to build additions can be tricky, and getting the house to pass final inspection can be nerve-wracking. Many people compromise their remodeling projects to fit into permit requirements, which often results in odd-shaped additions. And if you addition is "not conforming" expect a nightmare of problems, particularly if even just ONE of your neighbors complains to the county.

Now granted there are transaction costs in buying and selling a house. But if you are using the same agent for both transactions, he or she may be willing to cut their commission slightly.

Note when I say "new home" I don't necessarily mean new construction, but a home that better fits your needs. It may be that one of your neighbor's homes, recently remodeled, fits the bill nicely. Or it could be new construction. You never know. But before you start hammering, it pays to look around.

And if you are finding that you've outgrown your house, a good bargain might be a neighbor's house that has already been remodeled. For example, Bill and Sue remodel their home. They do a stellar job, installing a gourmet kitchen, modern appliances, and a sumptuous bath. Their home also has four bedrooms and three baths, so it is fairly large.

Paul and Linda live down the street and have always admired Bill and Sue's home, as they have a growing family and need the space that their 2-bedroom home doesn't provide. And Linda always wanted marble counter tops.

Bill is transferred to a new city and has to sell his home in a hurry. Why let some stranger get a good deal on the house? Paul and Linda approach Bill and Sue and make them an offer. Perhaps without a Real Estate Agent in the picture, they can cut out the 6% commission. They end up with their dream home for less than it would have cost to remodel their existing home.

(It is possible to make the contract contingent on the sale of your existing home, so you don't end up in the awkward situation of having two mortgages to pay at once. The equity in the old home is transferred to the new home in back-to-back closings).

And yet, many people would never think to do that. Approach remodeling projects carefully. Chances are, the home you want, particularly in urban areas, already exists, just down the street or in the next block. It may be cheaper to buy anew than to try to make your home into something it is not - a process we call "Dressing the Pig".

But like anything else, do the math. Chances are when you add it up, remodeling is no bargain.

UPDATE:  A neighbor here on the island did a stellar job of remodeling his home.  His strategy was interesting.  He wanted a home here on the island, but wanted it all-new and to his specifications.  It took him several years, but he found a very distressed and under-priced home in the location he wanted.   He gutted the entire place and "started over" turning a 2-bedroom home into a four-bedroom showplace. 

Since the entire house was done-over (and added to) and since he didn't live there, it was a lot easier and cheaper (in terms of cost per square foot) to do the work, as opposed to a single remodeling project (bathroom, kitchen, etc.).

All that being said, he has a beautiful home, but likely has "bought ahead" of the marketplace, in that he has more invested in the home today than he might get out if he had to sell overnight.  But in a few years, who knows?   Market values here might rise.  And it does seem like a trend, that many older, under-valued homes here are being bought and gutted.

We bought our home from a developer, who had gutted and remodeled it.   It was a lot easier to just put the key in the door and walk in, rather than have to deal with contractors, of course.

Remodeling can be kind of fun, but also stressful, and an expensive pain-in-the-ass.  We spend tens of thousands of dollars (over $100,000) remodeling our house in New York, and when we sold it, we ended up losing money.   Most people do.  Remodeling costs, at best, are recovered 50 cents on the dollar in resale.   If you remodel, you do it for your own pleasure, not for any financial gain.