Renovate or Buy New, Part II

A couple of years ago I wrote a blog post about how a person could decide whether to renovate their home or buy a new one. Well, it turns out this is by far the most popular search term for people who find their way to this blog, so with that in mind I thought it was probably time to expand upon the original post.

Here are a few more things for people who are trying to make this decision to think about:

1. A good rule of thumb for how much you should spend on a renovation is, do not renovate if the cost exceeds 30% of your home's value. More than that and you are in "overimprovement" territory and you may find it difficult to recoup the value.

2. You should consider the neighborhood. Renovations will show more ROI in some neighborhoods than others. If others around you are renovating their homes, it probably makes sense to renovate yours too. If other homes around yours are not being kept up, you will probably find it more difficult to get a return on your renovations. So, compare your home to the surroundings. Also, find out if there are any changes, such as new construction, road expansions or zoning changes, coming to your neighborhood. A call to your city or county planning department will only take a few minutes but could save you money in the long run.

3. Remember that renovation or remodeling is not the same thing as maintenance and upkeep. Maintenance and upkeep includes things like repairing a roof, new exterior paint, etc. These are just part of the cost of owning a house and do not usually add value to the house. Renovations that are mostly cosmetic, such as installing new flooring, also do not necessarily add value. However, adding additional square footage to your home or adding to the functionality of your home--for instance, upgrading a kitchen--typically do add value.

4. You need to look at what the market is doing. If the market is appreciating, you probably will be able to recoup some or all of the costs of your renovations as long as you choose them wisely. If the market is depreciating, this will be more difficult.

5. Consider the factors that a buyer would look at when evaluating your home. Are the schools good? Is the neighborhood generally good? Would a buyer pay more for a home in your neighborhood with the planned renovations? For instance, in some new construction tracts or condominium complexes, homes tend to be pretty similar, and they typically sell in a certain price range. When buyers are looking at the homes, they will compare your home to others that have sold. In neighborhoods like this, it's harder to recoup the value of renovations than in neighborhoods where the homes are more diverse. Older homes, even if they were originally tract homes and fairly similar, will typically show more diversity over time and it is somewhat more likely that you will be able to find "comps" to support your new price.

6. Most importantly, does your home fit with your lifestyle overall? Ultimately, the best renovations are the ones that make it possible for you to enjoy your home now and for several years to come, while still adding resale value when you are ready to sell. Sometimes, we just outgrow our homes and the renovations we perform simply forestall the inevitable. If you think this may be the case, it probably makes sense to consider a move.

Renovate versus buy new?

In the last few weeks, one topic has come up repeatedly among people I've talked to who are thinking of buying a new home, so I thought I would mention it here. With home prices rising so fast, people are really excited to hear about the values of their own home, but when they think of what the money they will clear in a sale will actually buy them in today's rising market, the excitement tends to fade a bit.

In a lot of cases, people ask, "well, what if I stay put and take the money I might have used to buy a new home and use it to renovate the one I'm already in?"

The answer from a realtor's point of view is that it depends why you are doing it. Do you want to stay put because you love the house, love the location, love the schools and can't imagine living anywhere else? Are you thinking it will increase the value of your home? Or are you doing it because you are concerned about the cost of a new mortgage?

Whether you decide to renovate or move, the cost to do either can be considerable. Some factors to consider in your decision include:

• Do you need more space, or a larger yard?
• Do you want better schools, parks and community facilities?
• Do you want to be closer to family or friends?
• Are you looking for less expensive housing or wanting to downsize?
• Do you want a better neighborhood or a new lifestyle?

Before deciding to renovate, make sure the improvements you are considering are not overimprovements. Consider the neighborhood and market prices of comparable homes in the area. If your home is currently worth $300K and you are considering spending $80K to renovate, will the home be marketable in the $380K range? If not, you may be taking on a great deal of additional debt that you may not be able to recover upon sale. It might be time to accept that this home may have met your needs once, but perhaps it is time to consider moving to a home that fits your needs now.

My advice as a realtor to those faced with this choice is to speak with a contractor and get a valid cost estimate for the improvements you are considering. Then speak with a realtor to find out whether there are any homes currently on the market that meet your needs better than your current home, and ask whether the planned improvements would add enough to the value of the home to merit the cost.

A general rule of thumb is to never spend more than 25% of the value of your home on renovations or improvements. Kitchen and bathroom renovations are usually a safe bet, because they often add more to the value of the home than they cost to accomplish, but other types of renovations can be riskier.

Some guidelines for those considering renovations include:

• It costs 50 percent more to demolish a brick wall than timber
• It is cheaper to extend out than up
• Swimming pools rarely add value (especially in Seattle!), though in some parts of the country, most notably Florida and California, not having one can detract from value
• Architects cost less than you think and can actually save you time and money
• Get at least three quotes from reputable builders and contractors, check references, and check their work
• Consider all your options thoroughly--including moving to a new home--before making a decision.
• If you are doing the work yourself, be sure to get a permit! This will ensure that you don't run into any marketability issues later--and this point is absolutely critical for those on septic considering adding bedrooms to their home.

Here's some more information on the cost vs. value of a variety of remodeling projects.