Home extension vs new home

[Dmslax45]

We are thinking about looking into adding on to our current home instead of dealing with the lack of homes and prices in our neighborhood. We would ultimately want to buy something in a very specific area (which we are in currently) and the number of homes that would fit what we are looking for is limited. After thinking about it, I’m starting to think it makes more sense, assuming the cost of the Reno is what we are thinking it is. Am I thinking about this the right way?

If our current home is worth $600k and we have a $350k mortgage. We bought the home 5 years ago for $420k and refinanced 2 years ago to a 2.875% mortgage.

we want to add additional living space, two more bedrooms, and make the kitchen and both bathrooms bigger. After speaking with others, we think that will all cost ~$350k. After it is done, I haven’t seen a single house under $900k that is similar in our neighborhood. Assuming those numbers are correct, my thought is we would be better off doing the reno vs buying new. We would have a net cost of $770k ($420k purchase + $350k reno) if we did the extension, vs buying a similar home for $900k.

We also would be able to keep to $350k mortgage at a low rate, avoid transaction costs associated with buying and selling homes, and have the house be exactly how we want it. Of course, the downside is living through the renovation, which I know cannot be overlooked. We would also be able to do some of the work in phases to help cash flow some of the work.

Everyone I talk to tells me it is never economical to do the renovations vs buying a home, but the way I am looking at it is the opposite. Perhaps I am thinking about this in the wrong way…?

[flyfishers83]

2 things to keep in mind. Your current house is worth $600k. What is it worth after you spend $350k? It will almost certainly be less than $950k. Most improvements don’t return 1:1. So you’ve got a house worth 600, you spend 350, and the end product is only worth 850-900, and Maybe significantly less than that, depending on the local market.

You might be talking about 1 year worth of work on your house. That’s not only very disruptive and stressful, but also has a lot of risk.

FWIW, we are currently planning a renovation that is approximately 2/3 of the purchase price of our house 4 years ago. If there were any suitable houses, we would buy them. Unfortunately there aren’t any, and the odds of any coming up for sale is low.

[2pedals]

We would have a net cost of $770k ($420k purchase + $350k reno) if we did the extension, vs buying a similar home for $900k.

....and you said your house is currently worth 600k it is not worth the 420k purchase. Reno cost should cost plus the house worth should be less than the equivalent house after reno (950k) that happens after one year. So if you needed to liquidate your home after renovation, will your house be worth all the sunken costs? Will your house be worth 600k + 350k (950k) ==> 500k + 400k (900k) if the housing market changes home market price drops and your renovation costs are not accurate in one year? Maybe not if the housing market is not good.

[Outer Marker]

we want to add additional living space, two more bedrooms, and make the kitchen and both bathrooms bigger. After speaking with others, we think that will all cost ~$350k. ...

Everyone I talk to tells me it is never economical to do the renovations vs buying a home, but the way I am looking at it is the opposite. Perhaps I am thinking about this in the wrong way…?

I think your reno budget is way low. We recently renovated the 1st floor of our house. It was 100 years old, so basically a complete re-do with new flooring, new kitchen, and new bath. No new exterior framing or space added. Cost was about $275K. Unless construction costs in your area are very low, I can't imagine pulling off your project for $350K. With more realistic numbers, the reno may not look so economicial. There are always cost overruns and delays. Remember old addage that it will cost twice as much and take three times as long as projected.

[Dmslax45]

We would have a net cost of $770k ($420k purchase + $350k reno) if we did the extension, vs buying a similar home for $900k.

....and you said your house is currently worth 600k it is not worth the 420k purchase. Reno cost should cost plus the house worth should be less than the equivalent house after reno (950k) that happens after one year. So if you needed to liquidate your home after renovation, will your house be worth all the sunken costs? Will your house be worth 600k + 350k (950k) ==> 500k + 400k (900k) if the housing market changes home market price drops and your renovation costs are not accurate in one year? Maybe not if the housing market is not good.

I’m not following this. If I am $770k into my house in actual costs (assuming estimates are right) I would need to liquidate my house for 770k to “break ever” no? I’m not sure why the current MV of my house really matters.

[pizzy]

We would have a net cost of $770k ($420k purchase + $350k reno) if we did the extension, vs buying a similar home for $900k.

....and you said your house is currently worth 600k it is not worth the 420k purchase. Reno cost should cost plus the house worth should be less than the equivalent house after reno (950k) that happens after one year. So if you needed to liquidate your home after renovation, will your house be worth all the sunken costs? Will your house be worth 600k + 350k (950k) ==> 500k + 400k (900k) if the housing market changes home market price drops and your renovation costs are not accurate in one year? Maybe not if the housing market is not good.

I’m not following this. If I am $770k into my house in actual costs (assuming estimates are right) I would need to liquidate my house for 770k to “break ever” no? I’m not sure why the current MV of my house really matters.

Because you could sell it. If you could sell for $600k today, or you could sell for $770k after adding $350k improvement. Then you lost $180k on the improvement.

You want to assume that a $600k house with $350k of improvements can be sold for $950k+

[Outer Marker]

^^^ This the correct analysis of opportunity cost on reno vs new purchase.

[Mike Scott]

I would first do an exhaustive search for a different existing home that works for you. If nothing comes up in a year or two and you plan to stay in the current house "forever" consider doing the renovation as a luxury expense. It's not likely to be the cheapest financial option.

[CPA without a cause]

I would never do a renovation like this unless I could also afford to rent another house for the duration of the work. Living in a construction site is hell.

Honestly, forget about the #s, a big renovation like this will destroy you mentally. It could be free, and I still wouldn't do it. The worst periods of my life have been during house projects I hired out.

Find another house. Drive around the neighborhood and knock on doors of houses you like and see if they are interested in selling off-market. Wait until something you like is listed and jump on it.

Anything but a big renovation.

[lakpr]

Find another house.
Drive around the neighborhood and knock on doors of houses

Not disagreeing with your advice, but the above could get you shot at and killed

[pizzy]

knock on doors of houses you like and see if they are interested in selling off-market.

Don’t do this.

[flarf]

Forget the economics for a minute. How are you going to live in the house when the kitchen and both bathrooms are torn out?

You might think you can do the work in phases, but your contractor will charge you a significant premium for that, assuming they even want to bid on the job with such an arrangement. Electricians and plumbers want to show up and do the entire job, not a little bit here and there.

Budget somewhere else to live during the construction period and re-evaluate. I'm wrapping up my third major renovation right now, so I'm the last person to say it's a bad idea, but I've also lived in precisely zero of those projects while they were under construction.

[srt7]

I would never do a renovation like this unless I could also afford to rent another house for the duration of the work. Living in a construction site is hell.

Honestly, forget about the #s, a big renovation like this will destroy you mentally. It could be free, and I still wouldn't do it. The worst periods of my life have been during house projects I hired out.

Find another house. Drive around the neighborhood and knock on doors of houses you like and see if they are interested in selling off-market. Wait until something you like is listed and jump on it.

Anything but a big renovation.

I hope you're joking about the bolded text. It's always been unsafe and only gotten worse in today's environment. Definitely not wise.

[srt7]

In your shoes, I'd sell and buy another house. It's too much renovation we're talking about here.

[Watty]

we want to add additional living space, two more bedrooms, and make the kitchen and both bathrooms bigger.

Working on an existing home is usually much more expensive than building from scratch and if you are dealing with a 40 year old house when you are done the end result is often just a 40 year old remodeled house with an odd layout that also looks odd.

For that much work it would be worth looking at tearing down the existing house and building a new one on the same lot. If you do that you would end up with a new house with a good lay out that might be worth a lot more than a remodeled house.

There is no way that you could live in the house while all that work is being done so you will need to find someplace to live and budget for that. In addition to living in a construction zone while the work is being done keep in mind that the workers will need a place to park and they will need places to stage the materials during construction.

In some markets the rental housing market is brutal and many landlords will not give you a month to month lease so you may end up needing to lease another house for two years since it is unlikely that you could get all that work done in one year.

One thing to keep in mind is that that depending on the age of your kids there may only be five or ten years until they will be heading off to college. If remodeling the house takes 18+ months then that is a significant percentage of their remaining childhood. For example if you have a kid that is in middle school they may only get to live in the remodeled house for four years before they head off to college but their lives would be disrupted for a long time during the construction.

The extra square footage may also require new heating and cooling system and the house may need to have major electrical with lots of rewiring and a new larger electric panel for the extra load. (Note: if you are getting a lot of electric work done then you might want to wire the garage for an electric car at the same time.)

Adding a lot of square footage may also leave you with very little yard which can be a negative and you will likely need to pay to replace the landscaping it so budget for that too.

We also would be able to keep to $350k mortgage at a low rate,

A problem with that is unless you have the other $350K that you will need to pay for the remodel is that you would need to somehow finance that as a second mortgage which would which could be at a higher interest rate. Combined your lower interest rate and the second mortgage might be a higher interest rate than if you just bought a different house with a 6%(ish) loan.

and make the kitchen and both bathrooms bigger.

Those would involve moving walls around and unless you have an unfinished basement moving things like sewer lines can be very expensive if you have to do things like cut into a concrete slab foundation. Some of the the walls you would want to move might also be load bearing or have utilities in them.

The kitchen and bathrooms might need to be eventually be remodeled but if you cannot live with the current footprint then expanding them may be very hard to justify since that can be very expensive.

After doing so much work the rest of the house will likely need to be refreshed with new paint and flooring to match the new sections so also budget for that. You may also want to reroof or reside the entire house too depending on the situation.

With as much work as you are planning you might be required to bring the entire house up to the current building code.

[hand]

Assuming those numbers are correct, my thought is we would be better off doing the reno vs buying new. We would have a net cost of $770k ($420k purchase + $350k reno) if we did the extension, vs buying a similar home for $900k.

Perhaps I am thinking about this in the wrong way…?

Everyone I talk to tells me it is never economical to do the renovations vs buying a home, but the way I am looking at it is the opposite. Perhaps I am thinking about this in the wrong way…?

I would think of it financially as follows:

Market Value of New House
- Current Market Value of House
- buy/sell transaction costs
- difference between present value of current 350k loan at low rate and 350k of debt at market rate
*****************************
Net After Move

vs.

Market value of house after renovation
- Cost to renovate ($350k + 10%)
*****************************
Net of Renovating


While there's clearly a negative related to living through a renovation (and to moving) I would treat these as qualitative differentiators after understanding the basic numbers.

While "Everyone you talk to" may be right that buy and renovate is likely to be more expensive than buying complete, transaction costs to buy and sell as well as the costs of giving up below-market debt may well tip the scale towards renovation. They did when I recently chose to renovate instead of upgrading.

[Carefreeap]

Forget the economics for a minute. How are you going to live in the house when the kitchen and both bathrooms are torn out?

You might think you can do the work in phases, but your contractor will charge you a significant premium for that, assuming they even want to bid on the job with such an arrangement. Electricians and plumbers want to show up and do the entire job, not a little bit here and there.

Budget somewhere else to live during the construction period and re-evaluate. I'm wrapping up my third major renovation right now, so I'm the last person to say it's a bad idea, but I've also lived in precisely zero of those projects while they were under construction.

We've done it and I agree it's probably smarter to move out. After moving back into our 1964 era house with original cabinets et cetera, it was time for a reno. We staged it; kitchen one year, baths the next year, downstairs another year. My contractors were good but living inside a construction zone isn't fun. We were retired and don't have any kids. I cannot imagine going through that with both parents working and school-aged children.

That said, our lot is truly unique and it would have been very difficult to replace it.

Good luck OP!

[Watty]

Find another house.
Drive around the neighborhood and knock on doors of houses

Not disagreeing with your advice, but the above could get you shot at and killed

Many neighborhoods have a Facebook(or similar) online group, HOA newsletter, or physical community bulletin board which you might be able to use to let other homeowners know that you are interested in buying a larger house there.

I get several letters a week in the mail with investors wanting to buy my house which go straight into the recycling bin and if someone knocked on my door asking to buy my house I would not even talk to them.

If you do a massive remodel or tear down and put a large house on your lot then you may also run into resentment from your neighbors since they will have to put up with construction for a year or longer and they may feel that you house is destroying the feel of the neighborhood.

[pizzy]

Find another house.
Drive around the neighborhood and knock on doors of houses

Not disagreeing with your advice, but the above could get you shot at and killed

Many neighborhoods have a Facebook(or similar) online group, HOA newsletter, or physical community bulletin board which you might be able to use to let other homeowners know that you are interested in buying a larger house there.

I get several letters a week in the mail with investors wanting to buy my house which go straight into the recycling bin and if someone knocked on my door asking to buy my house I would not even talk to them.

If you do a massive remodel or tear down and put a large house on your lot then you may also run into resentment from your neighbors since they will have to put up with construction for a year or longer and they may feel that you house is destroying the feel of the neighborhood.

Everyone has a price, no?

[slow n steady]

Ultimately, I this the number will probably be a wash and it should come down to which choice feels better to you and your spouse.

But as far as the numbers, I would try to figure it out with something like this.

Staying:
Price of the CURRENT value of your home
+ total renovation cost (be generous)
+ cost to live somewhere else during renovation (optional, but with this major of a renovation, almost mandatory, you basically have to move out and move back in)
=total cost to stay and renovate

Moving:
Price of a home which would make you as happy as your current house if it was renovated
+ realtor fees to sell your current house
+moving costs
+ NPV in the difference in mortgage rates for $350K of the mortgage (roughly 10K a year)
+ possibly higher property taxes
=total cost to move

Both would be stressful, but I think moving would be less so. Talk it over and decide which sounds better.

[toomanysidehustles]

Forget the economics for a minute. How are you going to live in the house when the kitchen and both bathrooms are torn out?

You might think you can do the work in phases, but your contractor will charge you a significant premium for that, assuming they even want to bid on the job with such an arrangement. Electricians and plumbers want to show up and do the entire job, not a little bit here and there.

Budget somewhere else to live during the construction period and re-evaluate. I'm wrapping up my third major renovation right now, so I'm the last person to say it's a bad idea, but I've also lived in precisely zero of those projects while they were under construction.

We've done it and I agree it's probably smarter to move out. After moving back into our 1964 era house with original cabinets et cetera, it was time for a reno. We staged it; kitchen one year, baths the next year, downstairs another year. My contractors were good but living inside a construction zone isn't fun. We were retired and don't have any kids. I cannot imagine going through that with both parents working and school-aged children.

Good luck OP!

Agree, we have rentals we moved into during our reno...might want to check out furnished finder, or 31+ day stays on airbnb.

As for moving vs. staying, this will be very specific for each family. Where we live, if we want a newer/bigger house we are moving east 20 miles which puts us in an area with no mature trees, no conveniences, grocery stores close, etc.. But the houses are new and bigger! We loved our area and it made more sense to stay and renovate.

[William Million]

We did extensive renovations after purchasing a 50 year old house - all new wiring, plumbing, new rooms, etc. It was not a cheap option, but we could afford it and it's an area where you just can't get a lot like that one.

[finite_difference]

I would never do a renovation like this unless I could also afford to rent another house for the duration of the work. Living in a construction site is hell.

Honestly, forget about the #s, a big renovation like this will destroy you mentally. It could be free, and I still wouldn't do it. The worst periods of my life have been during house projects I hired out.

Find another house. Drive around the neighborhood and knock on doors of houses you like and see if they are interested in selling off-market. Wait until something you like is listed and jump on it.

Anything but a big renovation.

Not necessarily. Depending on the remodel, a good remodeler should be able to keep your house habitable. For the last month or so might be a bit inconvenient.

[finite_difference]

Ultimately, I this the number will probably be a wash and it should come down to which choice feels better to you and your spouse.

But as far as the numbers, I would try to figure it out with something like this.

Staying:
Price of the CURRENT value of your home
+ total renovation cost (be generous)
+ cost to live somewhere else during renovation (optional, but with this major of a renovation, almost mandatory, you basically have to move out and move back in)
=total cost to stay and renovate

Moving:
Price of a home which would make you as happy as your current house if it was renovated
+ realtor fees to sell your current house
+moving costs
+ NPV in the difference in mortgage rates for $350K of the mortgage (roughly 10K a year)
+ possibly higher property taxes
=total cost to move

Both would be stressful, but I think moving would be less so. Talk it over and decide which sounds better.

Moving is the most stressful thing ever. Buying and selling houses is also a lot of work.

A remodel is a lot of work but will let you have things exactly as you want them.

If the cost is similar and you like doing the work of designing your house I would personally favor that route. You need to find a very good builder/remodeler.

[leeks]

If you love your neighborhood and house, and you plan to stay there forever, and you can afford the renovation (even it it runs far above current estimate), then you should do it.

But if you would really prefer a different house in the neighborhood, but just haven't seen one on the market, I would wait for one.