When it comes to buying a home we are often caught in the net of whether we buy new, and pay a higher price or buy a less expensive home and do renovations. For some this may be an easy answer, for others they may struggle with the best decision for their finances and family. Let's take a look at things to consider before we decide.
If you're open to renovations but also budget minded you have to weigh the pros and cons of buying a new construction vs. one you can renovate. There are pros and cons to either decision. The first few questions we must answer for ourselves are as follows:
1. Is the home I want to renovate in an area that will allow it? Some homes are in neighborhoods where you have a homeowners associations also know as HOA. These homes typically cost a little more upfront because they have rules and regulations with regards to the appearance of each home in that neighborhood as well as offering amenities such as pools, playgrounds etc. Interior renovations are usually not the issue, but exterior changes will need to meet with the Home Owners Associations approval. They have to agree and sign off on all plans you have including but not limited to exterior paint color, certain landscaping plans, structural changes etc. This means you have to hire not only a licensed contractor, get all necessary permits, but also have the work inspected routinely and shut down if there is any infractions or work not done to code. Once a building inspector comes to the property, if he finds something with the existing home that is not to code you will be required to bring it to code before you can even begin any new renovations. That can all get very costly because that is an unforeseen expense that will have little to do with your new plans for the home. If renovations appeal to you, steer clear of homes that have HOA fees. You will not be allowed the same freedom to do what you want with your home.
2. Have I ever renovated before? If the answer is "no" you need to be aware that renovations typically take longer and cost more than any time or cost estimate you're likely to receive even by the best builder or contractor you can find. That being said, you do end up with a custom home well suited to your tastes and families needs. Just be aware that renovations and estimates are not set in stone. If the home is extremely old or has not been well maintained, there could be hidden issues that must be fixed way before you can start the fun things like picking out paint color and choosing decorations. Be realistic with your expectations, Rome was not built in a day, homes don't get in bad condition over night and thus to restore them to their best condition does not happen in a blink of an eye either. Too many times those who have never gone through renovations tend to believe all fixes are simple. "Oh you just need to put in a door, or window that should be easy and quick." Not necessarily. If new frame work must be done, bigger openings have to be made or rotten wood is present, what seems simple and fast can be time consuming. Be realistic, especially if you know your home has some of these issues beforehand. It gets ugly before it gets pretty. That is how all renovations are. Even when you're not dealing with rotten wood or custom fitting, tools can break or malfunction, someone could get hurt during the work, there's endless hold ups and snags along the way. Some will only affect your timeline, others may affect your budget.
3. Can I afford renovation? Renovations as stated above, can often cost more than the estimate because there are many variables that come into play that just can't be known to the contractor or builder ahead of time. You have to set aside or allow in your budget a certain amount of contingency funds for the unforeseen. Ideally, mark up 10 percent of the budget estimate just for the unknowns. No one likes to spend money on things they can't see, however, rotten wood, bad plumbing, etc if left unchecked and un-repaired can come back to bite you later on and cost far more to fix. Better to spend while you have the money than to wait until it hits you at a time when funds might be low or non existent. If you have limited funds, the type of home your want to look for is one that is not very old and only needs cosmetic improvements. These tend to be fairly straight forward and offer the easiest in renovation work.
4. Can my life handle a renovation? Renovations can be stressful. Shaky marriage, kids, new jobs, new schools, new area, new neighbors all can wreak havoc on your design dreams for your new home. The home as mentioned in previous paragraphs will be ugly and in disarray for a time before you actually get to enjoy the beauty of your creation. Things must be torn down, ripped apart and rebuilt to create new space, new appearances and new functions and this means, eternal messes, noise, dust, dirt and distractions. Big renovations are usually the worst to live with and in some cases you may want to not move into the home until the renovations are complete. If you can't carry the mortgage and rent at the same time you'll need to factor that into your decision. Smaller renovations say $10,000.00 or less, usually are a minor inconvenience but still something you can live through. Make sure you can handle the temporary changes a renovation will thrust into your life, your routines and your relationships. Only the strong can survive. That being said, if you end up purchasing a home for $130,000.00 and make the right investments in the renovations, you could very well end up with a home worth $200,000.00 or more depending on what homes in the area are ranging in price wise. This means equity and equity is like money in the bank.
5. What are the existing values of the homes in the neighborhood? Let's say you've got big ideas and big dreams of creating the perfect home and you've caught the renovation bug. Great! Now you've found a home you just know you can make a show place. Wait! Before you sign on the dotted line, what are the homes worth in the area you're buying in? Have you checked what other homes in the area are selling for? These are called "comps/comparables" and they are the indicators used to determine your homes value. What you want to look for in your home is the ability to increase square footage first and foremost. Why? Well lets say you bought your home and it is 1500 square feet and sells for $130,000.00. The largest home in the neighborhood is 3000 square feet and completely updated and is selling for 330,000.00. This tells you that you can increase your home up to double its size and expect to gain in equity several hundred grand. Now most of us aren't going to buy a home and double the size, but the idea is, you've bought a small home in a neighborhood with big homes in it. This gives you the best chance of gaining significant equity in your home for your renovation dollar. If this same 1500 square foot home for $130,000.00 is in a neighborhood with other similar sized homes and values, and you increase the size by 1000 square feet you are not likely to see a huge return on your investment because the comparables dictate your homes value. Comps that are only going for $130 grand are not going to boost your homes value. Buyers are not expecting a large home for $230 grand in that neighborhood. Those who can afford that are going to be shopping in neighborhoods where all the homes are in that range. Not many want the biggest home in a small home neighborhood because the base price of those small homes is low and will affect their home's appraisal. However a small home in a big home neighborhood will be expected to be larger and go for more so it allows the renovator the latitude to gain equity. High comps raise your homes value by association. So you'll be able to get back some of your investment by renovating. Buyers will expect an updated larger home so you'll be free to expand and improve and get a higher appraisal should you wish to do a cash out refinance or sell in the future. Something to think about.
The bottom line is never go into any venture with your money without doing some research. Being smart always pays off in the long run.
