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Is It Time To Remodel -- Or Buy A New House?

Keeping up a home for 30 years may cost you up to four times its purchase price. Is it smarter just to buy another home every 10 years? Here's how to decide.

By Liz Pulliam Weston

When his clients ask whether they should remodel their homes, financial planner Phillip Cook of Torrance, Calif., likes to recount the night he and his wife spent trying to keep El Nino rains from flooding their partially renovated home.

"All these tarps over the construction came loose, and we were up there trying to pound nails at 3 a.m. to keep them from blowing away," Cook said. "My poor wife. And the neighbors . . . "

That wasn't the only nightmare the Cooks faced in the year-long transformation of a 900-square foot beach bungalow into a 2,600-square foot home. The ongoing hassles, the unexpected expenses, the now-you-see-them-now-you-don't workmen -- all have left Cook with little question about whether remodeling or moving is better.

"It's like asking if you should poke yourself in the eye or go on a cruise," Cook said. While he likes the end result, "I wouldn't do it again."

Americans love (or say they love) to remodel

There are, of course, plenty of people who are happy with their renovations, and remodeling is certainly a thriving business. Americans spent $233 billion last year fixing up their homes, according to Harvard University's Joint Center for Housing Studies, and the boom shows no signs of slowing.

For many people, though, moving is the simpler, less expensive and certainly less stressful option.

At first glance, there seem to be plenty of cost advantages to staying put and renovating. If home prices are accelerating rapidly in your area, you may be able to add on for less than it would cost you to buy a bigger home.

You also avoid the considerable costs of selling your home, buying a new one and moving, which can drain away 10% or more of the value of your home each time you change abodes.

Does buying and staying really pay off?

In fact, the conventional wisdom about building wealth is that the fewer times you move in your lifetime, the better.

Let's say you have two homebuyers, each starting out with a $100,000 home. The first buyer stays put for 30 years, while the second moves up to a bigger, more expensive house every 10 years.

As you can see, the move-up buyer can wind up with a much more valuable home. But this buyer also paid more over the years in monthly mortgage payments, and he still has 20 years left on his final loan. Factor in those two things, and the buy-and-hold homeowner seems to come out ahead.

Who wins: The buy-and-hold owner or the move-up buyer?    

Buy-and-hold owner

House value

Equity

Move-up buyer

House value

Equity

Year 1

$100,000

$10,000

Year 1

$100,000

$10,000

Year 10

$179,000

$104,000

Year 10

$180,000

*$104,000

Year 20

$321,000

$272,000

Year 20

$448,000

**$311,000

Year 30

$574,000

$574,000

Year 30

$895,000

$700,000

Equity:

$574,000

Equity:

$700,000

Total payments:

($194,000)

Total payments:

($350,000)

Net profit

$380,000

Net profit

$350,000

*Moving cost: $18,000; cost of new house: $250,000

**Moving cost: $45,000; cost of new house: $500,000

This example assumes each home is financed with a 6% 30-year loan and that all homes appreciate by 6% a year. Any equity, minus selling and moving costs, is applied to the next house.

Our example doesn't factor in the higher utility, insurance and property tax payments our move-up buyer would have to make. And our buy-and-holder might be even further ahead if she invested an amount equal to the difference between the mortgage payments she was making and those she would have made on a more expensive house.

Some expenses this equation doesn't consider, though, are the costs of maintenance, repairs and updates. These are far more than most homeowners realize.

The high cost of keeping up with the Joneses

In fact, a study commissioned by the Wall Street Journal in 1998 found that the price of keeping a typical home up to current standards over a 30-year period is almost four times the home's purchase price.

If our buy-and-holder wasn't a committed do-it-yourselfer, she might be no better off than had she rented all those years. The cost of repair and renovation bills as she dealt with failing household systems could easily overwhelm her profit.

Meanwhile, our move-up buyer could be leagues ahead if he snagged a new or fully remodeled house each time.

Obviously, though, the choice between moving and remodeling involves a lot more than money. You may be deeply attached to your current house. Or maybe you love the neighborhood but can't find a better house nearby that you can afford. Or perhaps, like Thomas Jefferson and the addled widow of Winchester Mystery House fame, you simply can't stop yourself from putting your stamp on a house.

If that's the case, you still need a few reality checks. The first is that money spent on a remodel really isn't an investment -- it's consumption.

How 'necessary' is this project?

The word "necessary" is in quotes, because a bigger or nicer house is a want, not a need.

That's easy to forget when you're drooling over the neighbor's newly-redone kitchen or tripping over your kids' toys in what feels like an incredibly shrinking house. But generations of families have lived in homes that are probably a lot smaller than and perhaps not as nice as yours.

Remember, the average new home in 1970 was about half the size of new construction today -- and it had more people living in it. (The average household size was 3.14 people back then, and 21% of households had five or more people. Today the average is 2.62 people, with only 11% containing five or more.)

Before you assume moving or remodeling are your only choices, consider alternatives:

  • Declutter. Getting rid of excess stuff and organizing what's left can transform your space, said designer Nancy Geoghegan, without the expense of a move or remodel. "Once they clean out and clear up, they discover they have more space than they thought they did," said Geoghegan, whose Fort Lauderdale company One Day Decor specializes in helping clients redesign their homes using their existing stuff. "Everything takes on a completely different feel."

  • Refurbish instead. Kitchens, for example, can be updated by refacing cabinets, resurfacing countertops and replacing worn flooring. That's going to be a whole lot cheaper than ripping out all the cabinetry and starting over.

  • Repurpose rooms. Never use that formal dining room, but need a home office? Rather than build or buy, consider reusing the space you've got.

What are the real costs involved?

Getting a handle on costs may be one of the toughest parts of any move vs. remodel decision, largely because renovations can be hard to predict. Once you tear into a wall or start excavating, who knows what you'll find?

An architect can help give you a ballpark on a remodel, and she may even point out some ways to save money. But for the real scoop, you'll need to get detailed quotes from a few contractors or builders who do work of the same type and quality that you want. You need to talk to someone who buys materials and bids projects every day, said builder Stephen Lane, to get an accurate price picture.

"I quoted a plan for a customer some years ago where the architect told them the cost would be about $100 per square foot," said Lane, owner of Lane Custom Homes in St. Charles, Ill. "I left the meeting with the wife crying and the husband doing his best to keep the 'dream home' alive as I was (the cheapest of three bidders) at $132 per square foot."

Remodeling veterans recommend building in a safety net by adding 10% to 20% to whatever estimates contractors give you. Then consider:

  • The out-of-pocket costs of construction (any savings or other funds you plan to devote to the cause).

  • The cost of any financing (usually your monthly payments multiplied by the time you plan to remain in the house).

  • If you're adding on rather than renovating, the cost of higher utility bills, bigger homeowner's insurance premiums and greater property taxes from your additional space.

When computing the costs of moving, consider:

  • Real estate commissions, closing costs and moving, which typically equal 10% or more of the house you're selling.

  • The cost of the new, presumably bigger mortgage, multiplied by however long you plan to be in the house.

  • The cost of higher utility bills, bigger homeowners insurance premiums and greater property taxes over the same period.

  • Any new furniture, window treatments, landscaping or other the years.

How are my finances?

Because home renovations are a luxury, they need to be considered only after you've taken care of the basics. You should be saving adequately for retirement, be free of credit card debt and have a nice fat emergency fund.

If your finances aren't absolutely rock solid and you really can't put off the move or remodel decision, Cook recommends moving.

"Remodels always cost more than expected, versus a purchase price, which is fairly well known," particularly for buyers who get a good home inspection before they purchase, Cook said. "Obviously, you may run into some unexpected costs, but they won't be on the same scale" as a remodel.

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