Historically, almost two-thirds of households in America live in a place they own. Homeownership is a key prong of the American dream, and according to a American Housing Survey by the U.S. Census Bureau, some 9 out of 10 Americans achieve it during their lifetime.
Also key to American homeownership is the notion of moving up – i.e., buying a home, living in it for a few years, then selling to reap the profit in order to purchase another property, either a higher-value place or one that better suits the owners’ current living situation. This was particularly popular in high-growth areas like California and Las Vegas. But that was before the recent economic downturn and a massive slump in housing prices. Now, the decision to sell your house and trade up is not as clear-cut as once thought, and owners are left wondering, Should we stay, or should we go?
Families evolve, whether through the birth of children, the acquiring of possessions, or an increase in job rewards. That charming little cottage two lovebirds started out in often becomes an overstuffed matchbox with too few bedrooms and too many toys, tools, and tricycles, with people stumbling over one another in the course of daily life. Privacy is nonexistent, noise and tensions regularly escalate, and stress is a frequent guest at the dinner table. The only solution is more room.
On the other end of the spectrum, older couples find themselves with unused rooms when their children move out. A home that was once perfect for a bustling family suddenly seems empty and uncomfortably idle. Or occasionally, people simply want a change of pace, a new focus. The dissatisfaction is not excessive space but rooms that no longer fit the lives and interests of the occupants. Ideally, they would cash in on a home’s built-up equity and seek a new property.
The Choices: Relocate or Remodel
In boom times past, when a marked increase in the value of a current home was all but guaranteed, owners would put their place on the market and immediately begin poring over the “Homes for Sale” listings, knowing they’d be scoring a considerable profit. Today, agents blare about a “buyer’s market,” a time when home prices and mortgage rates are historically low and bargains abound.
The flip side: Houses are decreased in value, and sellers simply can’t get the price they need in order to afford a new home. As a result, many homeowners elect to stay in place and consider improving or remodeling their current home, which in turn might result in added value to the property. Two kids’ bedrooms might become a single roomy home office, or a once-needed formal dining room could be popped out to expand an existing kitchen.
According to BuildFax, a national research company analyzing real estate construction trends, the rate of remodeling is the highest since 2004 and has been a “bright spot” in the struggling economy. But whether a family sells or stays, each choice has unique advantages and disadvantages.
Moving is always exciting, as the unknown holds within its grip all kinds of potential. But selling and repurchasing a new home is not for the faint of heart. It’s a stressful time, and you should go in with your eyes wide open.
- A Fresh Start. Generally, the buzz you get from moving into a new home is exceeded only by a marriage or the birth of your children. You’re in new surroundings, meeting new neighbors, starting from scratch, and able to build any type of life you want. It’s a chance to slough off the old and expand your social network.
- A Focus on Family. Though there’s an excitement to this fresh start, it’s often tempered by fears of the unknown: You don’t know the people, the places, the shortcuts, or the ins and outs of your new area. But during this period of adjustment, families often benefit by retreating into the comfort of known relationships and shared interests. This hunkering down could prove to be the nexus for new traditions that last for generations.
- Familiar Financing Options. The sale and purchase of houses are well-worn practices, with multiple sources of professional assistance available at every turn. A real estate agent handles all the details for the sale of your home, the search and purchase of a new house, and solicitations and negotiations with interested parties. A mortgage lender generally coordinates the legal transfer of the property, including title searches and insurance, tax filings, and legal work, in addition to providing the funds to buy the new home. In short, you’re in familiar territory here, daunting though it may be.
- Favorable Income-Tax Consequences. There are numerous tax laws that affect the calculation of taxes upon the sale of one’s home and the repurchase of its replacement. A married couple can exclude up to $500,000 in gain from the sale of the initial house if they meet certain conditions. And tax credits may be available, depending on when you buy property. Definitely seek professional advice to understand the tax implications of selling your home and buying a new one. But know that, currently, conditions are favorable.
- High Transaction Costs. Selling a home and buying another usually involves the payment of agent commissions – one on the sale, and one on the purchase. These real estate fees, which usually total 6%, do reduce the profit and increase the cash necessary to complete the transaction. In addition, there are appraisal expenses, title search fees, title insurance, and legal fees. These are in addition to what would be paid if you only refinanced your home mortgage.
- Logistical Hassles. Let’s face it: Moving is a pain, if for no other reason than that you have to deal with years and years of accumulated “stuff.” The greater number of people in the family, the more belongings – needed and unneeded – there are to sort through. Admit it or not, we all have a little pack rat in us, so having to organize, box, and move our possessions is time-consuming, expensive, and possibly hazardous to the items being moved. You just need to buckle up and consider it a means to an end.
Ah, a revamped domicile done just how you like it: new rooms, bigger spaces, function and form. Sounds ideal, but before you jump in, know that refurbishing a home has its own unique stresses.
- Cheaper. On a per-square-foot basis, the cost of remodeling is generally less than the retail market price of an existing structure. For example, say a 1,500-square-foot house has a market value of $150,000 – or $100 per square foot – while a 2,000-square-foot structure on a neighboring property would sell for $190,000, or $95 per square foot. If all other factors – location, lot size, amenities – were the same, a homeowner could spend up to $47,500 adding 500 more feet of living space without exceeding the market value for the neighborhood. Assuming those were smart modifications that would, in theory, bring in a high-percentage return on the dollars spent, it just might be a no-brainer.
- Stable. Staying put means having the same neighbors, shopping at the same stores, and going to the same schools. Some psychologists claim that only the death of a family member, divorce, and the loss of a job are more stressful than a home move. Remodeling allows the family to stay in comfortable surroundings.
- Familiar. Living in a house for a while means you know the age of the air conditioner, when the most recent roof repair was performed, and when hundreds of other necessary little tweaks were made over the years. You know what to expect in utility bills and if the sewer line is likely to need replacement next year or in 10 years. Proponents might say, better the devil you know than the devil you don’t.
- Customizable. Few people are able to find everything they desire in a house. The closets may be too few, the floors may have carpet instead of hardwood, and the kitchen and bathrooms could be outdated. Sure, a new house would be new, but it, too, will likely lack at least some of those special features that have you yearning. Remodeling allows you to alter the structure or add amenities exactly to your specifications (and to your budget, of course). “A home is like a husband,” my wife often tells me. “I didn’t get a man with all the qualities I wanted, but I got a man with most of them – and I have been working on him ever since.”
- Impractical. If your purpose is to downsize, remodeling rarely makes sense. Eliminating or consolidating space by moving external structural walls is rebuilding, not remodeling. You should consider such a project only if there are no available homes in your desired location that would fit your needs. Or if what you’re seeking from a remodel is, in reality, more of a residential do-over, that will likely require a massive outlay of funds and almost certainly not return them to you in value.
- Difficult to Finance. Remodeling projects are typically paid for through a homeowner’s loan from a commercial bank, which approves a second mortgage on the property. These generally require a higher credit rating from borrowers and carry a higher interest rate and shorter payoff terms. Other forms of financing include family loans, extended payment terms from a contractor, or even vendor loans for appliances and equipment. Approvals depend on several factors: the equity in the home before the project, the cost of the remodel, and the expected market value once completed.
- Construction Hassles. Remodeling a home is akin to getting root canals over and over for months: The pain can be overwhelming. Granted, there are good contractors who will minimize the sting, but there are few things as irritating as awakening daily to the high-pitched whine of an electric saw, the footstomps of strangers before your morning coffee, and regular “looks like this will cost a bit more” meetings. Anyone contemplating a remodel would be well advised to rewatch the 1986 Tom Hanks movie “The Money Pit” before jumping in.
It’s easy to tell when you need more space or a new configuration – the trick is in how best to achieve it. Both relocating and remodeling are commonly used to accomplish the objective, and each can be satisfying and effective if you go in with all the knowledge you can glean. Choosing correctly can minimize your aggravation and ensure your family years of good living.
Remodel or relocate: Which one proved the right move for you?