You own an older home in a desirable neighborhood, and you have determined that you don’t want to move. So should you tear down to build a new house, or do a major remodel? Here is a 4-point framework for thinking about the issue.
- Economies of Scale. As projects get larger, new construction can be less expensive (but not always). For example, a major remodel might include tearing down walls to insulate, air seal, replace electric and plumbing, HVAC, new floors, new bathrooms and kitchens and everything in between. You might even bump out the back to expand the kitchen and master bath. By the time you are done, you are spending in the $150-$200 per square foot range over thousands of square feet. New construction of an Energy Star or Net Zero Ready home might cost in the $125 – $150 range (code-compliant homes are less). At some level of remodeling spend, it is more cost effective to tear down.
- Is your home “competitive” with your neighbors? A few weeks ago, we just highlighted the Cost vs. Value Report that discusses the return on investment for remodeling projects. This report provides sage advice when your home is similar to your neighbors. But that report won’t hold true if your neighborhood is filling up with large new tear downs and you have one of the older small homes. In that case, your remodeled home will be valued based on the land. Whether you sell it as is, or sell it after putting $100K-$200K of remodeling into it, nobody will pay to live in an older smaller house at the prevailing market price. Why? Because developers will pay more than a consumer who intends to live there (so long as there is demand for large, expensive homes). The developer is looking to take the small house and convert it to a new large home for 2-3 times the price. If you have substantial equity in your home (mostly in the form of escalated land value), then you can be your own developer, and reap the financial rewards.
Looking at the photo below, is the house of the left “competitive?” Would putting $100K into the home on the left impact its resale value?
- If you remodel, spend only what you need. Some people don’t need more space. They just want a few big adjustments (such as creating a first floor master, or to modernize the HVAC/electric/plumbing systems) so the home performs better and will last another 20-30 years. If you intend to be in the home for a long time, if your home has “good bones” and you still love how it looks, then remodeling seems like a better choice. You spend the money and enjoy the benefit by living in the space. But if you are thinking about a large addition that you don’t really need because you think you’ll get the money back when you sell, you’ll want to consider whether the look and size of your remodeled home competes effectively with the tear downs around you. Are you spending your money to create a “competitive” home? If it isn’t competitive, and the change isn’t really valuable to you, then you could be throwing money down the drain. Plus, additions are typically very expensive ($250-$300 per sq foot). At some point, you’re better off tearing down than adding large additions.
- What’s your budget? In this area, it is possible to start looking at tear downs when you have a budget (cash plus financing) starting around $400K if you have modest goals. If you live in a more competitive neighborhood, where houses are closer to 5,000 square feet, you really want to think along the lines of $750K to construct an Energy Star or Net Zero Energy Ready home and its foundation, plus another $50K-$100K for deconstruction (demolition) of the original house, permitting, landscaping, utilities, etc. If you hire an architect to build a custom home, add another 10-15%. Then you need to furnish it. Yes, that’s a lot of money, but unlike a car that loses value when you drive it off the lot, your brand new, competitive home could be worth more than you spent because you unlocked the value of the land and because you have a wonderful finished product that you could sell at any time. If you think property values will hold up, then you’re making a smart investment, and your bank will want to help you make it happen by offering construction loans, mortgages, and federally subsidized 203(k) loan products based on the anticipated value of the home after the construction is complete.
ecobeco Can Help You Make Hard Decisions
Whether you’re seeking to remodel or build new construction, we can help. Our 4-point framework is just a starting point. At the end of the day, we want to help you create the home you always wanted, incorporating energy efficiency, comfort, indoor air quality, and sustainable materials when possible. Each situation is different so give us a call.
Contact us or call (240) 623-5632 to speak to a specialist today.