Every residence, whether it is a single family Cape Cod style house, a farmhouse or a condominium, has an ownership lifecycle. When the owner first takes possession and moves in, he/she has at least thought about the likely duration of his/her stay. Generally speaking, condominiums and starter homes have shorter ownership lifecycles than four bedroom colonials. Ultimately, however, most homeowners will be faced with a decision as to when to make a change.
Among the leading factors causing homeowners to start thinking about their home's lifecycle is the decision between expanding the current residence and moving to a new one. This is a battle often fought by small, but growing, families who are on the cusp of outgrowing their starter home. Five years ago, when the couple, perhaps with a newborn, found their perfect first house, they thought they would be there forever. They love the neighborhood; the street is quiet; it is close to work, friends and family...etc. Everything is great.
The trouble is that five years is a long time. Now, Little Jimmy is climbing the walls; his younger sister is running around like a maniac; and another sibling is on the way. The neighborhood is still great and everyone loves their commute, but the family needs more space. Mom and Dad are constantly tripping over the Exersaucer as if there was one in every room in the house. The third bedroom really isn't a bedroom after all as it does not have a closet or even a window. It is fine for the in-laws, but could they really justify keeping their new baby in there? Inevitably, the family must decide whether to add on to their current residence or hit the market. Once the ice is broken on this decision, the floodgates open and the homeowner is awash with multiple scenarios, quotes based on thin air, unwanted advice from his mother-in-law, anecdotes from people he hardly knows and countless other factoids that he and his family now have to consider before they are able to decide what to do. The happy couple needs to take a deep breath and begin to gather information in an organized manner so they can make the right decision for their family.
The factors to consider include the following:
The Fastest Way to the Dream House
- Limitations Facing Expansion
- Expansion - Slowing the Lifecycle or Resetting the Clock?
- Maximizing Homeowner Equity
The Fastest Way to the Dream House
What Constitutes the "Dream House?"
After spending the last five years in their current house and visiting homes of friends and neighbors, our couple has generated a wish list for their dream house. It is important to discuss the needs and wants of the family as these details can play deciding roles in the ultimate decision. For instance, if a master suite with a full bathroom is the number one item on the wish list, and your current home is on a septic system that is at its maximum capacity, you may have your answer. Call your broker and start your search. On the other hand, if you have specific needs and are very particular about how you want your dream house to be, it might be more realistic to build it yourself as the likelihood that you will find everything you are looking for on the market is not always very high. Usually, it is not that cut and dry and most homeowners find themselves somewhere in the middle, so the important thing is to know what you want out of your next house. Once that list is compiled, you can then start to strategize and make assumptions as to whether that house can be molded from the current framework of your existing home, or if you need to move.
Limitations Facing Expansion
Logistical Limitations
There are a number of logistical limitations facing a homeowner's ability to expand his current residence. The first hurdle to overcome, before you have even thought about hiring and architect or contractor, is to determine whether your town's zoning regulations will allow you to expand the footprint of your current house. You need to understand terms such as:
Lot Coverage Ratio: the portion of a lot that is covered by a building or structure. The ratio is calculated by dividing the square footage of the lot by the square footage of the structure. Zoning laws restrict additions that result in a lot coverage ratio that exceeds the allowable maximum.
Non-conforming Building: a building or structure in existence or lawfully begun prior to a change or enactment of a zoning regulation that would otherwise render said building or structure to be not in compliance with the new or amended by-law. For example, to curtail density, towns have, over the years, increased the minimum lot size requirement on which to build a house. Houses that exist on lots that are less than the current minimum are considered to be non-conforming.
Setback: a setback is the minimum horizontal distance from a lot line or a street line to any part of a building or structure. Zoning laws restrict expansion that encroaches on designated font, side and rear setbacks.
These are the primary restrictive covenants that homeowners face when considering expansion, but a trip to the building department for a copy of the local bylaws is worth making before committing to a renovation project. Most towns and municipalities now publish their bylaws on their websites. To the extent your plans are not in accordance with the rules of the town, you are faced with two options:
- Abort and start your search for a new home, or
- Prepare an appeal to the town's planning board or other designated appellate body.
Should you go the route of the appeals process, know you will have likely added significant time to your project and potentially costs as well in the event that architects and attorneys become involved. Plus, there is no guarantee that your appeal will be successful.
Once you have at least gotten yourself as comfortable as anyone who does not actually write bylaws for a living can be that you would be within your rights as a property owner to proceed with your plans to expand, you should start to consider the less mind numbing, but equally important logistical limitations facing your hopes of manifest destiny. For starters, how long is this going to take and where are you and your family going to live while all these renovations are going on?
Keep in mind that for the sake of this discussion, "expansion" and "renovation" are not synonymous with "redoing a bathroom" and "painting the hallway." We are talking about knocking stuff down, making holes in walls and completely disrupting the serenity of your living room. It is not likely possible, especially if young children are involved, that families can (or would want to) reside in a home that is being significantly altered or added on to. As such, the family needs a place to go. This is where logistical limitations sometimes meet financial limitations. Unless your neighbor is away for the next nine months and conveniently needs a family of five to water his plants or grandma and grandpa live in a five bedroom house up the street, the need for temporary housing becomes an issue. In certain communities, for instance those with colleges or corporations that provide temporary housing for certain employees, such arrangements can be made relatively quickly and without breaking the budget. Still, attention needs to be paid in advance to this issue when considering the magnitude of the expansion process.
Part of the problem with temporary housing is the ever elusive delivery date of your certificate of occupancy (ie - your ticket home). The fact is that you, as a homeowner, cannot effectively control the expansion process beyond paying for it. As such, you will likely need to come up with a best guess as to how long you are going to have to sign up for your temporary lodgings. Any project that requires pouring a foundation, framing rooms and putting on a roof is going to easily put you into the six to eight month timeframe. No contractor will ever admit to that statement and any of them that have managed to get this deep into this less than builder-friendly review should be commended for their open mindedness. Still, it is a reality that these projects have built in inefficiencies. For example, the process is not a fluid motion despite the fact that the intersection of the components (ie plumbing, electrical, framing...etc) is fundamental to its progression. Ask a homeowner coming off a major renovation how many times she heard the plumber tell her that he is waiting on the electrician to finish before he can continue or that the lumber yard delivered the wrong materials so that has to be sorted out before the roof can go on. Delays will occur. These projects are not unlike any other service provider. Just because you want to sue your golf pro tomorrow doesn't mean your attorney has an opening in her schedule. Because subcontractors are often working on multiple projects at once, you are going to have days where it does not seem like anything is being done. Guess what? It is because nothing is being done. Part of a construction supervisor's job is to manage the homeowner's expectations by continuing to come up with believable reasons for why no one is currently inside with any tools.
Fiscal Limitations
Aside from the logistical and organizational highway that needs to be navigated, many homeowners, especially young families, simply do not often have cash on hand sufficient to finance major home improvement projects. In many cases, these homeowners exhausted their savings when they made the down payment on their starter house, and they have since been making contributions to retirement plans and college funds, but do not have much left in the kitty for a master suite and family room addition. While this does not spell the end of the discussion on whether to renovate, it can complicate matters.
The first place to look for renovation funds is in your house. Not necessarily under the mattress or in the seat cushions, but in your equity. Since 1968, median sales prices of existing homes in the United States have increased by an average of 6.34% annually[1]. As such, over the five years you have owned your starter house; it is likely that your asset has appreciated - even in the current state of the local real estate market. You have the ability to borrow money from an institutional lender using the equity in your house as collateral. This type of loan is called a home equity line of credit (HELOC). With a HELOC, you have access to funds, but you draw down on the line as you need it, and you only pay interest on the funds you draw upon. The rates are generally low, but tend to be variable and are tied to a market index such as the Prime Rate (currently 8.25% vs 6.50% at this time last year[2]). You can use this money to fund the improvements to your house or for whatever purpose you choose. In addition, home equity lines of credit can also provide benefits to the homeowner in the form of tax deductible interest. Another option to a homeowner looking to pull money out of his house is a second mortgage. Second Mortgages differ from HELOCs in that they are usually in the form of a lump sum payment with fixed rates and terms.
Still, there is a fine line between whether you are better off reinvesting your equity into your home or selling your home and moving into a bigger house. This will be explored further in the section entitled "Maximizing Homeowner Equity."
Expansion - Slowing the Lifecycle or Resetting the Clock?
End Game
The next question to ask is: by expanding our current home, are accomplishing our long term dream house goal, or are we merely slowing down its lifecycle? Because expansion does not guarantee a dollar for dollar return on investment in the short term, if the results do not add significant time to the home's lifecycle, it is likely that the homeowner's best move, from an investment perspective, is to move. However, if our family of four with a baby on the way is mashed into a two bedroom ranch on a large lot and adding a second floor and expanding into the backyard can net a 4 bedroom, 3,000 square foot colonial that can serve as the family compound for the next three generations, then money spent to renovate will likely be more than recovered when the home is ultimately sold (if it is never sold then you, your family and their families have enjoyed a beautiful home that has long since been paid for).
Maximizing Homeowner Equity
Market Effect
Equity is only equity if the market says it is. In other words, if you bought your house during the height of the market in the 2003-2004 timeframe and put 10% down, that 10% is likely still the only real equity you have in that house. Granted, you may have made some principal payments and some other improvements that could move the number up a bit, but for all intents and purposes, your house really is not worth too much more now then when you bought it. Because the market has slowed, short term appreciation rates have declined. As such, your buying power, beyond having credit sufficient to take on a higher mortgage has not changed in the few years since you bought the house in which you are now living. If you decide to move, you will likely be breaking even on your current home and trading up for a new house with a larger mortgage.
The best case scenario is the family that bought their starter home five years ago and watched it appreciate while they paid down their principal and saved some additional money for a new house. This family's buying power is at an all time high. The market for homes in the starter home range has not slowed to the extent that homes in the $700,000's and up have. As such, the family selling their starter home to move into the next level can expect a stronger dollar on the sale of their home versus the price they will need to pay to move up into the next price range.
Plan of Attack
Tying it All Together
There is one fundamental element of all this that has been ignored until now. The fact is there is rarely a clear cut, right answer to the Expand versus Move question. In reality, all of these focal points are blended together with the unique set of circumstances facing each homeowner. The best approach is to explore both avenues equally. On one hand, look into the permit process with the town and what the local zoning laws are; talk to architects and contractors; talk to your bank or a mortgage broker about a HELOC. At the same time, go to open houses - if not for potential purchases, but even for design ideas. Talk to brokers about listing your house to firm up your expectation as to what it is worth. Talk to friends and neighbors about their renovation experiences. Perhaps you will be able to get some references for contractors, subcontractors, architects, attorneys, etc[3].
At the end of the day, it comes down to what each homeowner values the most. The biggest positive in favor of expansion is the personal element. You have added your personal touch to your home beginning with the first day you saw it when you and your spouse were picturing where the television would go on the way home from the open house. Expansion gives you the opportunity to further customize your most valuable asset. If you want double sinks in the master bathroom or vaulted ceilings in the new family room, you can have them. There are no guarantees that any house on the market is going to meet all of your personal expectations. Unfortunately, as we have discussed, there are more barriers to the expansion process than there are to moving. However, if you can overcome the obstacles, your dream house is already waiting for you at home.
[1] Source: National Association of Realtors
[2] Source: Wall Street Journal, 8/22/06
[3] Note: Hawthorn Properties' sister company, Hawthorn Builders LLC, is a real estate development company based in Needham, MA. Hawthorn Investments has a vast network of contacts in the construction, painting, electrical, plumbing, legal, architecture and other fields such as appliance retailers...etc. Contact Hawthorn Properties for a referral or with general questions