Should we remodel or build a new house?

Q: After getting an architect to draw up great remodeling plans and talking to a builder or two, I’ve come to the conclusion that we’d be better off to tear down our house and start over. One problem is convincing my husband that I haven’t lost my marbles. He thinks it’s a huge waste. He also thinks we’ve invested too much money in the architect to stop now. I say this is a cheap place to stop. The architect can incorporate many of the details and drawings into the new home. The other problem is cost. For $300,000 I can get a jazzy remodel on part of a 37-year-old house. Or, for the same $300,000 I can get a wonderful house, with no sagging corners, no wiring woes, great plumbing and energy efficiency. We have a great lot on a stream with lots of trees. We have one of the “cheaper” homes in a lovely neighborhood of $600,000-plus homes. Is this cost-effective? How does the bank handle this? We were going to get a home equity loan or refinance our current mortgage to pay for the remodel. But if we tear down the house, there goes the equity. Do we apply for a new construction loan, and how do banks react to this?

A: I agree with you. On a dollar-per-square-foot basis, remodeling is usually much more expensive than new construction.

Here’s why: When a builder constructs a house from the ground up, every step of the building process is coordinated for maximum efficiency. First, the walls are framed, then the plumbing and wiring is installed, then the wall studs are covered with sheetrock, etc.

On the other hand, when a builder undertakes a remodeling project, he is forced to work within an existing structure. Portions of walls must be torn out, then rebuilt. Work crews must work in cramped quarters. Defects in the existing home (such as sagging corners) may force the builder to make compromises to seamlessly connect the old and new portions of the house together. Worst of all, there are almost always unpleasant surprises when you start peeling away the “skin” of an older home, such as dry rot in the walls and floors.

All of these headaches cause remodeling contractors to charge more for their services than they would for a new construction project. The extra cost is justified by the problems mentioned above, but be aware that some remodeling contractors drastically overcharge for these complications, so always shop around before signing a remodeling contract. You may save as much as 25 to 30 percent of the total project cost.

The bottom line is, remodeling is almost always more expensive than new construction. Therefore, you are wise to “clear the decks” by tearing down your existing home and allowing the builder to start from scratch. Yes, you will have to spend more money on architect’s fees, and the total budget may exceed your original plans, but the final result will most likely be vastly superior to a partial remodel in terms of “bang for the buck.” Just be sure to check with your local building department to make sure that a total tear-down is legally allowed on your lot. In some cases, you may have to leave at least one of the existing walls standing in order to technically qualify as a “remodel.”

As for financing the project, you will have to obtain a new construction loan rather than a home equity loan or refinance if you elect to do a tear down. You should get an “all in one” loan which would cover the construction phase of the project and then convert to a permanent mortgage when the construction is completed. This saves you the double closing costs that you would have to pay if you got a construction loan and then a permanent mortgage after the construction was finished.

One final note: You mentioned that you have a stream running through your property. You might run into a “sensitive areas” zoning violation if you tear down your existing house and build too close to the stream. Again, contact your local building department to make sure that your building or remodeling plans won’t violate any zoning rules or regulations.

Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at business@heraldnet.com.

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