||Ask Dr. Don
Remodeling vs. building an
Dear Dr. Don,
Our home has greatly appreciated over the
last four years. We paid $200,000 for the home and it is currently
worth around $275,000. We are in need of some additional space. We
have an unfinished section of our basement that could be turned into
an additional bedroom or we could put a room over our garage. The
basement would cost about $5,000 and the addition would cost about
$40,000. They are currently building houses in our neighborhood in
excess of $300,000 and $400,000. Their square footage tops ours by
500 to over 1,000 square feet.
We are interested in maintaining the lowest mortgage
payment possible. We have $20,000 available for use. We had thought
to put this amount on our mortgage and refinance our home, but this
was prior to our acknowledging our need for additional space. We
do not plan to remain here forever, but we do anticipate being here
for another five to 10 years.
What would be the best way to handle our situation?
Should we put the $20,000 on the house and finish the room in the
basement on the cheap? Should we borrow an additional $20,000 and
expand the house bringing it closer to the square footage of the
new homes? Or should we do something totally different? We would
appreciate your thoughts.
I don't advocate that you take on remodeling projects to
meet the next owner's needs, especially when you plan on staying
in the house for another five to 10 years. Your return on the investment
is in your gaining use of the space. I may be a little bit jaundiced
in my opinion, since where I live large homes are routinely remodeled
every time the home changes hands.
Your first step should be to talk to a local real
estate agent or two about the advantage or disadvantage of owning
the smallest home on your street. You may be surprised by the reply.
While owning the biggest house in the neighborhood can be a problem,
owning a smaller home in a neighborhood of larger homes may not
carry the stigma you think it does.
You state that you want to keep a low mortgage payment.
Therefore it seems to me making unused space usable is where you
want to go. Why spend $40,000 if you can get the same utility from
spending $5,000. Don't do it on the on the cheap, however, since
weekend warrior projects that look like amateur night at the hardware
store won't score any points in the resale market when you eventually
put your home on the market.
Most remodeling projects and home renovations don't
add a dollar-for-dollar benefit to your home's price. The National
Association of Realtors annual Cost
vs. Value Report discusses the potential return on investment
for different home improvement projects by region. Their 2002 Cost
vs. Value Report can help you see what's going on in your market.
While you're at it, take a look at Bankrate's
Guide to Home Improvement.
Still, even if you assume that you'll get 75 cents
back on the dollar, you'll reach break-even on the investment in
six to 10 years if your home's market value appreciates at an annual
rate of 3 to 5 percent. That's a large part of my reasoning as to
why you should remodel to meet your needs and not the needs of the
-- Posted: Aug. 13, 2003