Buy, Remodel or Rebuild?

Bickmore Construction, Doran Taylor Design, Meagan Larsen Photography

If you are one of the lucky few who bought your first home after the housing crash of 2008, chances are you’ve been doing your happy dance over the last few years. You’ve watched your home value increase as much as 50% since the market bottomed out in 2010. Even those who bought during the mid 2000 housing bubble and as late as three years ago, have still seen a 30% increase in their home’s value.

Paradoxically, this spike in equity has left many homeowners who are looking to upsize, particularly Millenials, in a bit of a conundrum. Yes, they could sell their 2000 sf home they bought for $320,000 in 2010 for $550,000, but what would it get them? To double their square footage, they will be paying upwards $1,000,000 to get a comparable home in a comparable neighborhood. Or, if they’re lucky, maybe they could snag a fixer upper with a bit more square footage at $750,000. Either way, their equity is tied up in their house and they cannot buy a new home without selling their existing home.

Suddenly, their equity isn’t as advantageous as they thought when faced with the prospect of uncertainty and the cost of taking out a $700,000-plus mortgage or mortgage/construction loan combo.

The question of how to best leverage home equity is the million dollar question of 2018; one that we hear every day, and Tony Bickmore, of Bickmore Construction, hears as well. When we first reached out to interview him about this topic his quick text response was, “It is literally what most of our clients ask us about. Everyone has some equity in their home and can’t decide if it’s worth buying, or staying and remodeling.”

Bickmore Construction, Cindy Hyde Design, Meagan Larsen Photography

REFRAME YOUR HOME’S VALUE

It’s hard not to think of your home as an investment, especially for homeowners who have recently watched their real estate returns soar. But the extreme rate of return over the last 8-10 years is an anomaly, and assuming the same rate of growth in the future impedes a lot of people from thinking more broadly about their choices.

“One of the first conversations I try and have with clients who are thinking about remodeling or building is that their home is not primarily an investment.” Tony explains, “Yes, your home is going to appreciate over time; you don’t get outside investors pouring billions of dollars into our economy without them thinking their investment is paying off. Salt Lake will keep growing and home values will keep rising. But things will never be as they were—when labor and materials were cheap and you could double a home’s size, redo it and still be at a profit. People need to shift their mindset to building homes to live in, not solely as investments.”

Bickmore Construction, Ashley Winn Design, Meagan Larsen Photography

EVALUATE WHAT’S WORTH KEEPING

If leveraging equity is the first question homeowners ask, the second is not far behind: if I choose to go the construction route, what do about the updates I’ve already made? In Tony’s, and our experience, homeowners in this situation often have kitchen, bath, basement or cosmetic updates they’ve made or were made to their home during the 2000’s housing boom.

“It’s really hard for homeowners to think about having to cut into an 8- or 10-year old kitchen remodel or a newer basement to get additional space or functionality…But with a lot of older homes, especially, you are looking at outdated systems, not optimal layouts, or engineering issues, it’s hard not to get into what’s already there.”

Unfortunately, there isn’t a hard and fast rule about what to keep and what to let go. If changes are recent, construction quality high, and style on-trend, it would make more sense to sell a home at a maximum cost/sf and move on. If the areas in question are worn out or outdated, the decision to gut and remodel is more straightforward. In most cases, the decision falls in the grey zone and requires some legwork to figure out what’s worth keeping and what you need to let go.

But at the end of the day, the biggest question homeowners on the fence should ask themselves is, “Do I want to keep my neighborhood?” In Tony’s opinion, this is the deal breaker, “Unless you don’t like your neighborhood, it’s hard not to stay where you are at in this market.”

Bickmore Construction, Cindy Hyde Design, Meagan Larsen Photography

ASSESS YOUR TOLERANCE FOR CONSTRUCTION

Whether renting or staying with family, the stress of temporary housing and troubleshooting construction is overwhelming. In Tony’s experience, “People really struggle with an intermediate place to live, especially if they need to sell first to use their equity for a new home. When you take someone’s primary residence away from them, they become a whole new beast. You really need to mentally prepare for the battle: paying double rent, living with in laws; you are setting yourself up for a complicated year.”

Tony advises clients to think through their stress tolerance and the personal demands of construction before starting the process. If construction holds no interest for you, the thought of displacement terrifies you, or you have an aversion to making important decisions on short notice, selling your home and starting afresh with a home that needs less work might be your best solution.

Another often-ignored fact is that buying a new home is still the least expensive way to acquire additional square footage. Homes in the Yalecrest area in April were selling on average at $254/square foot. That’s significantly less than the average addition/remodel cost of $200/sf and rebuild cost of $250/sf on top of an existing mortgage obligation.

GET TO WORK

At the end of the day, the only way to figure out what to do is to get to work.  As Tony aptly put it, “It’s a leap of faith one way or another.”

First, talk to a realtor or hire an appraiser. They’ll present you with an accurate market analysis of your home’s value.

Second, talk to a lender and start the pre-approval process. They can tell you exactly what your mortgage options are for a new home and options for a construction loan on your existing house.

To get an idea of what these three options might cost, we asked Jesse Theurer of Mortgage Brokers LLC to give us some ballpark figures for comparison. These comparisons are based on the article’s premise: a household with 2,000 sf looking to add 2000 sf (total of 4000 sf) who purchased their home in 2010 for $320,000 and is now valued at $550,000. These comparisons are purely theoretical and broad in scope. There are many variables that will affect the cost of a loan and we recommend speaking with a lending professional about your specific situation.

BUY, REMODEL, OR REBUILD COST COMPARISON

Conditions*

2010 Purchase Price, $320,00

2018 Appraised Value, $550,000

2018 Accrued Equity, $333,000/Mortgage Payoff, $217,000

*Based on 30-year mortgage, 4.5% rate, 20% down payment, no additional payoffs or loans. Taxes and insurance not included. **Based on 30-year mortgage, 4.75% rate, all equity for sale of home going towards new home purchase, includes realtor and other fees/credits. Taxes and insurance not included.***Based on mortgage payoff amount of $217,000 plus $800,000 ($200/sf) construction loan. The appraisal value on a completed home should be 80% loan to value.****Based on mortgage payoff amount of $217,000 plus $1,000,000 ($250/sf) construction loan. The appraisal value on a completed home should be 80% loan to value.

Third, it’s time to take as many home tours as you can. Call back the realtor (or find one) and talk with her about your criteria and expectations. Don’t limit yourself to looking at homes online; you will be surprised by the ah-ha moments you will have on site.

Fourth, if construction is still an option, approach a contractor or architect. Tell them what your budget is and ask approximately what they think that will buy. Tony has some basic generalizations for what to expect in a remodel or rebuild project (see chart below).

It is important to note that if you do choose to remodel or rebuild and you require a construction loan, your lender will require detailed architectural plans and a line by line breakdown of every expense before your loan is approved. This process of planning and approval can take from 8 months to a year or longer  and any budget change must be re-submitted and approved by your lender.

Another consideration when taking out a construction loan for a remodel/addition or rebuild is the home’s final loan-to-value ratio. The industry standard for all construction loans is 80% loan to value, meaning that in the scenarios above, the remodel/addition option would need need to appraise at $1,271,250 ($318/sf) and the new build option at $1,521,250 ($380/sf). While the remodel/addition cost per square feet falls into the higher end of what would be accepted by an appraiser in our neighborhood, the rebuild cost per square feet is pushing the limits of approval.

In Jesse Theurer’s experience, “More often than naught, those who tear down are bringing in cash funds to make up for the difference in appraisal value and actual construct cost levels. In essence, they are underwater based on current market values.”

General Construction Cost Guidelines

*All costs are based on average-priced finishes and material selection. For higher-end homes expect to pay closer to $250+/ sf for remodels with additions and $300+/sf for new construction.

Bickmore Construction, Cindy Hyde Design, Meagan Larsen Photography

MAKE IT HAPPEN

If you’ve decided to take the plunge and move, start packing. Even if your moving plans are a year away, begin decluttering your house and make that repair to-do list. A realtor can walk through your home, prioritize your home maintenance projects and give you a list of pre-staging ideas.

If you favor the construction route, start talking seriously with a lender, contractor and/or architect/draftsperson/designer. When you are ready for a construction bid, it is worth the extra time to request estimates from 2-3 contractors.

Tony shares his tips for hiring a contractor below. The biggest mistake he sees homeowners make is not comparing apples to apples in the bidding process. “Most high-quality contractors in this market are going to be using the same materials, finishes and a lot of the same subcontractors. If a budget is too low, chances are they aren’t giving you everything you are asking for—they plan to raise the price once they start the project or the quality is not going to be great…Choosing a contractor really comes down to work style, reliability and fee structure. And definitely talk with past clients to see if they were happy.”

How to Hire a Contractor

Approach a potential contractor with at least one of the following:

• An architectural plan, or
• A budget (and share the entire amount; don’t hide anything in your back pocket)

Ask for references and walk through a recently finished home.

Talk through fee structure.

• Fixed: A clear budget that is not to be exceeded
  • Advantage: Your budget is capped and the responsibility is on the contractor to make a profit
  • Disadvantage: You have little control over materials and subcontractors
• Cost Plus: Cost of all construction material plus 10-20% commission
  • Advantage: Allows for flexibility in upgrading materials and choice of subcontractors
  • Disadvantage: Costs can get out of control, contractor upsale
• Cost Plus/Fixed: Contractor fees are fixed at 10-20% at the start and don’t increase
  • Advantage: Allows for flexibility in upgrading materials and choice of subcontractors without contractor upsale

Many thanks to Tony Bickmore, of Bickmore Construction. We can’t say enough good things about Tony and his team: their work is of the highest quality and they are honest, hard working, and communicative! Check out their portfolio on Houzz, or follow them on Instagram @bickmoreconstruction. You can also call them with construction questions or to request a bid, (801) 712-2053.

Bickmore Construction, Meagan Larsen Photography