Addition vs. Move

utherJuly 4, 2013

We have decided that our house needs a master suite. It is currently a 3/1.5 built in the 1920s.

Here are the pro's to adding on:

We love our house and our neighborhood because it is walking distance to a great school, parks, pool, etc.

Our house has a 2 car garage which is a rare find in our neighborhood.

We finished our basement a few years ago and it is really beautiful and functional.

The problem, as you might have already guessed, is the cost of the addition compared to what it will be worth when complete. We have professionally drawn plans, approval from our town, and have ordered a "subject to improvements" appraisal to get an idea of what the home's value will be with a master suite. We should have this back in a few days.

Has anyone been through this? I have done my homework and, in my part of the country, home additions like the one we are considering will bring about 60 cents for every dollar spent. I guess I need to wait a few more days and see what the appraiser comes up with. I'm just starting to think I'm not going to like the number...

If you have been through this process, I would love to hear from you.

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Sophie Wheeler

60 cents on the dollar is a REALLY good number. In a lot of areas, you really only get 40 cents. And that is if the home isn't made the largest and nicest in the neighborhood, which carries it's own penalty. Bear in mind, that means that for your 100K addition, you will lose 40K as an expenditure to make your life more comfortable. That's a lot better than it costing 60K to be able to have your own suite. Also bear in mind that you don't get that "added value" until you go to sell. You still spend 100K and have to come up with that money.

Take 10% of the value of your current home, as that is what it costs for you to move, and then take the 90% of your current equity in it as the down payment on a new space. See where that can buy you something in a location that you would like that has the same amount of amenities as your current home after it's renovated. Remember, that you would need to also tack on the cost of the renovation to the homes that you are looking at in order the keep things on a level playing field. So, if your current home is worth 600K, and you're planning on doing a 100K renovation to it, you're starting point at looking for something new would be the 700K range.

And factor in the interest rates. A home reno loan is not likely to be at as good a rate as a mortgage. Financing 700K (minus your down payment) of a new purchase is likely to be less per month than your existing mortgage plus a 100K loan at a higher rate.

All in all, after the numbers crunch, there are still intangibles that trump the numbers. If you love your location and neighbors, that's something that you might not get in a new location with new neighbors. To many people, that's worth paying more each month than it would be to pay less and live in a nicer newer house. Some things just have to be factored in as an "expense" that's worth it for you to pay. It's like driving a BMW rather than a Ford. Both will get you where you want to go, but the Beemer offers a different driving experience during the ride---for those who value that.

    Bookmark   July 4, 2013 at 12:39PM
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annzgw

As we all know, Real Estate value can go up or down quickly so unless you're planning on selling the house in the next few years I don't think the appraisal you receive today should affect your decision to build the addition. IMO, if you intend to stay in the house long term, the additional space improves the function of the house for your family, and finances allow you to build and enjoy it, then go for it.

We remodeled two homes and in the long run each remodel had little impact on what it sold for. The market crashed while we were selling the first home and we lost money. On the second home the market was at its peak and we made a profit. It came down to location-location for the buyer and after all our 'improvements', they tore out a lot of what we'd done and built what they wanted.

    Bookmark   July 4, 2013 at 12:58PM
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uther

Thank you both for your excellent responses. I think if we did the addition, we would hope to be in this house for about 10-15 years.

    Bookmark   July 4, 2013 at 1:42PM
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annkh_nd

I would make a list of pros and cons of each scenario, and see what strikes you. If you think you can find a comparable (or better) house in a neighborhood you like, for the same price as your house + addition, great! But don't forget to factor in neighbors, landscaping, school district, potential maintenance (in both new and existing home). Compare the inconvenience of a renovation with the inconvenience of house hunting, financing, and moving. Be brutally honest with yourselves when listing pros and cons of each.

If you plan to live in the house for another 10 - 15 years, I would be more concerned about making it a home you love than resale, though you don't want to build something very expensive, or very unusual, which would make it difficult to sell. I would think that a master suite would be a selling point - not necessarily so you'd get your money back, but so folks with "master suite" on their wish list will even look at it.

    Bookmark   July 5, 2013 at 4:04PM
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weedyacres

One other factor to consider: what are people doing to the homes in the neighborhood. If most have an added-on master suite, then you're "safer" doing the same. If most of them are their original size, then you're likely overimproving and will get less of your money back.

    Bookmark   July 5, 2013 at 11:31PM
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kirkhall

We asked this question recently, and decided to add on. Why? Our reasons was as Holly explained...

When we took the net price of our house (after paying for broker fees, etc) plus the cost of the addition that we'd "save" by not adding on and looked at houses in that price range, it was nothing we wanted to buy. No houses in that price range were better than our house/location plus planned addition. Resale didn't much matter because we were planning to live there a while (and so are you. So, today's dollar on the addition is mostly irrelevant, unless you plan to refinance at the end to "pay" off your construction/addition loan).

So, think something like this. (my numbers are made up for the sake of this illustration, you plug in the right ones) If you sold your house today, the sold price would be $500k. You'd "take home" 450k (10% less than sale price). You plan on a 100k addition, so you should look at homes for 550k. If homes in your area in the 550k range are better than what you'll end up with when you are done with your addition, then you should move. If homes in the 550k range are not much different than what you have currently, and they'd still need 100k in improvements/remodeling, then I'd add on.

At least, that is what we did. Our "finished"/added-on house is still well within the average size of houses in my neighborhood (if not even on the small end) so we did not over-improve our house.

You say that a 2 car garage is unusual in your neighborhood. That means your house may be "one of the nicer/larger" houses in your neighborhood. So, you may want to make sure there will still be a market for your added-on house.

Another question to ask is... is my house and neighborhood new enough to support adding on, or will the neighborhood soon be "in transition" with developers coming in and doing teardowns to build something larger in place? You don't want the nicest house in a soon to be tear-down neighborhood. People won't want to pay for your improvements, only your land.

    Bookmark   July 6, 2013 at 1:42PM
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uther

I got so much good information here. We searched for a home that we would like as much as our current home with the addition and couldn't find one. I was starting to get nervous that we were in a no-win situation, but then the appraisal came back with a number high enough to make everyone comfortable with the addition! I'm very relieved and looking forward to having a master suite without having to move. Thanks all.

    Bookmark   July 11, 2013 at 10:59AM
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geoffrey_b

I would suggest you take a good hard look in the homes in your neighborhood. Are they well maintained?

Are other neighbors painting, landscaping, keeping their properties up?

The other thing - don't make an addition that eat's up the rest of your lot.

    Bookmark   October 29, 2013 at 3:27PM
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