Wednesday, August 19, 2009

How To Know When To Remodel Or Buy New: Real Estate Mom answers a reader question

Good morning, LITTOF Readers!

It’s Wednesday and you know what that means...

Words of Wisdom from the Real Estate Mom!

Today I’ll answer one of the wonderful questions I’ve received from a reader.

Gabrielle asks:

“How do you know when it's smarter to buy another house vs. fixing up or remodeling what you've got?”
Remodeling can be a pain. Your house is in disarray, you’re doing the dishes in the bathtub while the kitchen is destroyed, you have to go to Wendy’s to go to the bathroom, you can’t find your socks, the wallboard dust has seeped in between the pages of all your books, and there’s no place to sit down let alone have anyone over for a nice cup of tea, the contractor has just yelled “Uh oh!” for the fourth time today as he discovers the plumbing isn’t connected to the sewer and it’ll be $5,000 more to fix the problem, and you know all the contractors better than family members because they’ve “lived” with you for so long! Well, you get the drift.

However if you LOVE your home and your location, if you have an artistic flair and want to create your own space, if buying another home in your area with the amenities you're seeking is not a reality, if your remodel would not put your home out of the price range of the other homes on the block, and if you have a high tolerance for pain, then remodeling may be for you.

If you do opt for the remodel make sure to budget 20% above the quoted costs for over runs. Take a page from Steph and Bob’s book. Their remodel cost them all of their cash reserves and then some and the project took twice as long as they anticipated. The results were beautiful and the area they lived in could normally support a home of greater value just not in this market.

My advice- and remember this is coming from a die hard remodeler- in today’s world it is probably cheaper and smarter to buy rather than remodel. Now this is just MY opinion but here’s why I say this. Money is cheap right now to buy a home. If you have good credit you CAN get a mortgage at 5.3% 30-year-fixed rated with no points. The market nationally has adjusted downward about 20% making wonderful homes available for about what you would have paid for them in 2000. You may be able to move up to an area that was out of reach before. There are many short sales and foreclosures out there that are great opportunities if you have patience (waiting for the bank's approval) and are willing to buy a home without any warranties. Your costs in moving are a known while the remodel holds many surprises. I remember reading an article that said most people who remodel move within 5 years of that remodel, because the project didn’t meet all their needs.

But do remember, your current home has to be priced realistically for the market today. If you bought your home between 2004-2007 you probably paid top dollar for it. In order for a home to sell today it must be priced competitively AND in perfect condition. We’re calling the current market a “Price War and a Beauty contest” but that’s another post.

I suggest having three Realtors do a Comparative Market Analysis (CMA) on your house that will give you an idea of value in today’s market. At the same time, describe to the Realtor you chose, what you’re looking for in your next home so they can send you listings of what’s available. You can also go on Realtor.com (the site of the National Association of Realtors) Zillow, etc and look at available listings in your area yourself.

Hope that answers your question, Gabrielle. Please keep the questions coming, and I’ll do my best to get the answers to you.

On another note, I just want to say that I'm getting so much from reading the comments on Steph's last post - B is for...- about Bankruptcy. Thank you for the thoughtfulness in your comments and the great tips about what works for you in budgeting and managing your finances!

Until next Wednesday,

Pam- The Real Estate Mom

P.S. Make it a great day (my dad's favorite saying that I'm adopting)!

Photo Credit: Bob took this picture of their kitchen during the remodel. Needless to say, they used their microwave A LOT!


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30 Comments:

Kim Hooper said...

Great post! I was just thinking about this very issue. About 3.5 years ago, I bought a condo, where I live now. At the time, it was 400K. I love it, but it's very small and I dream of something bigger. I've thought about just remodeling (granite countertops, new patio deck, etc), but I'm a very anxious type and I think the project would make my head spin (plus, when I add up the numbers money-wise, it's overwhelming). I see homes on the market now that are much bigger (some twice as large as my current place) for 350K-ish. I could swing buying right now. The question I have is: What do I do with my current property? Is renting it out a smart option? I can't afford to take the loss on selling right now (I co-own with my parents, which complicates matters, as they don't want to take a loss either). I feel like my choice is either renting out my current place, or staying here until the market puts the value of my condo over 400K (which seems to be could be the year 2031). What do you think?

Kim Hooper said...

Oh, and I forgot to say that the value on my condo now is only 270K (so that's a huge drop).

Love in the Time of Foreclosure said...

Great question, Kim!

Cece said...

Great post, Pam! Love hearing your POV as a professional and a mom!

Anonymous said...

I think another factor to consider is property tax. We own in Silver Lake/Los Angeles and about 2 years ago, we struggled with this exact same issue. Sell and buy a larger, less "run down" space OR renovate? Our house and lot was small, but not tiny for our area. My husband bought in the late '90s, so our mortgage was very low and we had lots of equity in the house. With soaring house prices, especially in our area, we knew we could make a huge profit, but where would we move? We make a decent, but modest combined income and there was no way to "move up" in Silver Lake without putting ourselves at risk, not only for the mortgage, but on property tax as well. We learned that if we added square footage, only the new square footage would be assessed at the current rate and the existing square footage would remain at our old rate. This sealed the deal. We decided to do MAJOR renovation. We hired an awesome architect and our contractor was very skilled and not cheap. Plus we had to move in with the folks...and renovation is pretty gut-wrenching, but rewarding. In the end, our mortgage payment is still reasonable, our property tax remains relatively low and we have a beautiful "new" home.

Building Materials & Supplies said...

Great blog!

I think its better to buy a house that has potential and renovate and out your own mark on it.

Just get a good architect and builder on board to help.

Movinghouse is a pain, the only people that win are the estate agents and the government with stamp duty in the UK

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