Add on or Buy?

EMC2011July 14, 2011


Not sure if this is the right forum but here's my question. My husband and I currently own a small cape house in NJ. Bought it 4 yrs ago and put 30k into it. B/c of the market, it would sell for the same price we paid for it (345k) so we'd lose 30k we put in cash for upgrades plus 4% realtor selling fee + 8-10k in closing costs if we decide to sell and buy a bigger house. We'd walk away with 62k plus some savings we have.

We might be able to find the kind of house I'd want, for $360 give or take. With the $ we'd have this could be doable but we'd have nothing left for home improvements, even minor stuff.

The other option which we're leaving towards, is to add on a family room which i think might cost around 40k. Since we already paid off 20k of our existing mortgage, we wouldn't go over our original mortgage amount considering paying for half the addition with our own savings (the other half would be a loan). I think it would increase the value of the house 20k in this market.

Which option do you think is best? I know, might be hard to say, but would like thoughts.

thank you!!

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If you're buying and selling in the same (bad) RE market, it's a wash. You lose on the house you sell and gain on the one you buy.

Right now you can buy existing RE at a much lower cost per square foot than you can build *anything*, even an addition.

Can you add on 'seamlessly', so that the house looks as though it started life with a family room? If not, you may never recoup what you put into the addition.

You might get an idea of the construction cost by talking to your insurance agent about replacement costs.

How will you heat and cool the addition? How are you on living with construction workers and dirt for many months? (IMO moving is easier than renovating.)

    Bookmark   July 14, 2011 at 3:31PM
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I guess i was thinking we'd lose the 30k we already put into the house plus 20k in realtor and closing costs= 50k.

Addition total would probably including everything = 50k eventually.

The ac/heating unit may also have to be upgraded. Don't know yet.

I've never lived through a major remodel so i'm ignorant in that area. But i've lived through selling a home (just a small condo) and it was a nightmare, waiting and making sure everything is perfect, getting your hopes up, etc etc.
selling in this market will take months too. Not sure if i'm up for that or if our home would even ever sell.
the rest of our home is in great condition so i worry about buying a bigger house and not having much or any $ for issues or improvements.

you gave me some good food for thought though, thank you!

    Bookmark   July 14, 2011 at 4:11PM
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You should get some estimates for what you're thinking of for your addition. 40K barely buys a garage here and I'd bet that it goes a lot less far in your location than in mine. I believe you are underestimating the amount needed to remodel, probably by as much as by 100%. And you're underestimating the difficulty of obtaining a loan for a remodel. Those loans are more difficult to get than a mortgage nowadays. If you can't pay mostly cash for a remodel, then you shouldn't even think about remodeling.

Those real estate shows that erroneously influence people to renovate always show that a 80K remodel adds 80K in "value" to a home. Those shows are badly wrong. A family room addition in some cases can add about 20-40% of it's costs to your home's value. It's always a losing proposition in a pure financial sense. If the addition is worth the convenience and pleasure that it gives your family that's one thing. But don't do it with those bogus ideas of it adding to your pocket. Adding value to your home only works if you are selling your home and can put that money in your pocket or another home. Until you do that, it's merely an expense.

Home values aare continuing to drop in many areas of the country, and there are those who predict that they have another 20% to go before they hit bottom. Yes, it affects what you can sell your home for, but as was already noted, it also works on the other end when you buy, making your dollar go further than ever. You should go to some open houses and drive around to view a few properties for sale to get id3as of urrent pricing in your market.

In the end, only you can decide how to obtain more space fore your family, but it's certainly true that you can buy space for much cheaper than you can create it.

    Bookmark   July 14, 2011 at 4:31PM
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"I guess i was thinking we'd lose the 30k we already put into the house plus 20k in realtor and closing costs= 50k. "

I don't know why this way of thinking is so popular. You aren't going to lose 30k. You already LOST 30k. Just accept it and move on. It has no financial impact on the current decision.

Also, if you can get a home for $360k that is comparable to your current $345k home after the improvements, then that is the "added value" of the improvement - $15k, not $20k.

So, either way you end up with a home that is worth about $360k. It will cost you 20k to sell, maybe 10k to buy, and you'll take on an additional mortgage debt of 15k. That is a total of 45k in added costs. You think your construction costs will be 50k for the addon, but there are always overages. Neither moves or construction are fun to live through. Both propositions are going to cost you money - not make money. If you have the cash to do it, more power too you, but I wouldn't recommend borrowing more for this type of lifestyle upgrade.

    Bookmark   July 14, 2011 at 5:20PM
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Also in many areas of NJ houses that are in your price range and in good condition are selling fairly quickly. The homes that are at 500K plus sell much more slowly...and the higher the price the longer they sit. Therefore, do a bit of research on and Trulia to check to see if that is the case in your area.
If so, then you may sell much sooner than you expect.

    Bookmark   July 14, 2011 at 6:40PM
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My thinking is along the lines of Billl's. You want a family room. You can get this in two ways:

1. Sell this house (4%=$14K), buy another one ($10K), and buy up by $15K = $39K

2. Remodel this house = $40K

Based on your assumptions, it's a wash. I'd first really fine-tooth-comb your assumptions to make sure you can really get that upgraded house for $360K, for example, or that your desired remodel will really cost $40K. If one or the other of those moves $5K, it can change the equation.

Both options get you owning a $360K house at the end. So if the costs of getting there through both means are pretty close, you need to decide which is more hassle: building an addition or selling a home and buying another one.

Factors that should have no impact on the analysis:
-How much equity you have in this house.
-How much you've put into this house.
-How you'll pay for the remodel (cash vs. loan)
-How much your home value has gone up or down

    Bookmark   July 15, 2011 at 8:01AM
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Are you only looking for more sq. footage? Or are you more interested in another location? The questions I would ask myself in your position.

    Bookmark   July 15, 2011 at 8:19AM
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thanks so much everyone! we like the location, it's all about adding some space to our tiny home. i agree that buying a bigger house would probably be most cost effective per sq foot but what i didn't mention is that a bigger house at a price we can afford will most likely be outdated meaning we'll have to put even more $ into fixing it up (which we won't have). And i guess i'm not sure if i want to live in an outdated house right now. The home we have right now is 90% updated, just small.
i think we have more research to do before making a final decision...

    Bookmark   July 15, 2011 at 1:21PM
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A friend did what you are planning and she made money in the end. Realtor fees do add up. Remodeling is frustrating but so is selling. Good luck.

    Bookmark   July 15, 2011 at 3:01PM
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How big and how expensive are the homes within a few blocks of your current home, compared to your home? Beware of making your home the biggest/nicest/most expensive, or even in the top 20%.

If you'll be in the top-tier for size/price after your remodel, then it might make more sense to sell the place and buy a larger home that is surrounded by similar sized homes or larger homes.

Also, there might be a negative to a home that has had a room addition verus a similar sized home that has no additions. This depends on how the addition is designed/architected and built. It could appear to be a mismatch in styles, or a floorplan that does not flow well. If the addition is in the rear, the home will always look small from the road, which can be a negative when you sell it.
With all this in mind, I would likely sell and buy something else. However, I would shop real hard to try to get a good buy on the new place. Since you are in no hurry (right?) you can be a smart shopper.

    Bookmark   July 15, 2011 at 3:32PM
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thanks! :)
alot of the homes around us have additions and some don't and are the same size as ours. unfortunately we would have to wait until we were under contract with our house before we would be able to make an offer on another one and therefore, we would have time constraints, so we'd be in a bit of a hurry, ya :(

    Bookmark   July 17, 2011 at 1:29PM
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