Amid tight inventory and high prices, renovating instead of buying is the best strategy for some right now

Since the onset of the Covid-19 pandemic and the property market frenzy that quickly followed, one theme has remained consistent: buyers looking to move during this turbulent time have wanted turnkey properties they could take refuge in. immediately.

“Nobody wants to do renovations,” said Diane Ramirez, chief strategy officer of Berkshire Hathaway HomeServices New York Properties. “No one wanted to do it before [the pandemic]but now [with supply chain and labor shortages] there are also financial and timing issues.

However, two years of relentless price increases have combined with rising mortgage rates and inflation to create a new sense of price sensitivity. Between financial factors and a general lack of quality inventory, some potential buyers wonder if the cost of a new home is really worth it and whether, against all odds, undertaking renovations might end up being less of a headache. head.

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“There are a lot more people now who want to do their own project, or who are more or less forced to do their own project due to market pressures,” Frank Nolan, president of Vanguard Properties/Luxury Portfolio International, said at San Francisco.

For homeowners who might once have considered moving to a new home, adding value to their existing home may now make more financial and logistical sense.

“Many homeowners currently have significant capital that they could draw on to undertake a renovation project,” said Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors. “They may have a significantly lower interest rate, especially if they have blocked a refinance [when rates were] in the 2% range, which some have done.

According to the 2022 Renovation Impact Report released by NAR in April, refinishing hardwood floors, new wood flooring, insulation upgrades, and conversions of basements to living spaces are interior projects where homeowners are most likely to recoup costs or even increase the future of their home. resale value.

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“I have customers who are considering adding a [accessory dwelling unit] on their land rather than selling their current home,” said Dan Ortega of Sotheby’s International Realty—Los Feliz Brokerage. “Prices and competition being what they are, this may be a better option than going into the bidding war for a larger home. Especially if current prices for a larger home exceed the cost of the renovation.

A prime location is another factor that may make a renovation a more attractive prospect than a resale. “I find that many clients will do a complete rebuild of their current home, rather than move, as it is difficult to replace a location overlooking Sydney Harbor or one of the beaches here,” said Michael Pallier, a agent for Sotheby’s International Realty in Sydney, Australia.

As daunting as a renovation or construction project can be, here are some scenarios where it might be a better bet than buying new.

Record price tags on less than stellar inventory

Perhaps the biggest factor pushing more homeowners to renovate is not just the lack of available inventory, but among the small pool of properties for sale, a lack of quality that could justify the newly astronomical prices.

“What I hear from buyers in the $3-10 million range is, ‘I’m not going to spend money on a [new] house that I still have to redevelop,” said Frank DeValdivielso of The Keyes Company/Luxury Portfolio International in South Florida. “The quality of inventory on hand is not great, and certainly not to the satisfaction of buyers.”

“Quality is the most important thing for this type of buyer,” Mr. DeValdiveilso added. “If they feel they can improve the quality of their house, even if it takes them a year and a half, they’d rather do it than go buy something that someone else has improved and knocked down and it’s not the same quality.”

In markets across the United States, the proliferation of rapid reversals of varying caliber has changed buyers’ perception of new construction properties.

“There’s been a big increase in what I call ‘developer specials’, cheap townhouses at [Brooklyn] where they come in and do a quick renovation, install central air conditioning and turn it around,” said Deborah Rieders, a New York-based Corcoran agent. “Then buyers move in to find the HVAC hasn’t been installed properly, the kitchen cabinets are cheap, the floors start popping up. Over the years I’ve discouraged buyers from buying these quick turnarounds because you end up retrofitting something you paid a premium for [doing the work yourself] and have an advantage when you sell.

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Consider taxes

Aside from aesthetics, many homeowners might ultimately choose to renovate rather than buy a new home for a much simpler reason: a lower tax bill.

“When you move from one property to another [in Florida] you’re going to be taxed on the assessed value of that new property,” DeValdivielso said. “So if you spend $2 million more on a new property, you’ll have a $40,000 property tax bill that you wouldn’t have if you stayed in your old property and remodeled it.”

In some cases, the tax advantage is so great that buyers are willing to undertake construction projects from scratch.

“We have a wave of baby boomers who will be retiring in the next few years and are considering moving to Miami, but they’re in no rush,” said Julian Johnston, a Corcoran agent in Miami. Although a completed home on prime land for this type of buyer could be valued – and taxed – at $24 million or $25 million, said Mr. Johnston, a buyer who opted to buy equivalent empty land for $10 million and spending $5 million on their own construction would end up with the same high value for a property for sale in the future, but pay much lower taxes in the meantime.

“The actual retail value of the house is closer to $24 or $25 million, but your taxes [for the home’s assessed value if you built] are probably based on $12 or $13 million,” Johnston said.

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A complex cost-benefit analysis

After years of luxury buyers ignoring older properties, there are now deals to be had on often high-quality homes in prime locations, if a buyer is willing to do the work.

In San Francisco’s tight market, “I see buyers who can’t afford to go into a particular location to buy a house that needs a lot of work, and they’re willing to put in the years and work to actually be able to have the house they want in the place they want,” Mr. Nolan said. “It’s the direct result of escalating values.”

In some cases, an older looking home may be repriced but just needs a few relatively cosmetic upgrades rather than a full gut renovation.

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“I always find homes that need work are heavily discounted, move-in ready properties but not the perfect aesthetic for today’s buyer,” Ms. Rieders said. “I think there are incredible opportunities right now to pick up things that aren’t immediately aesthetically pleasing but have a great location and great bones. Maybe kitchen tiles and cabinets need updating, but the houses are structurally sound and in excellent condition, and do not require gut renovation.

Ms Rieders added: ‘People can’t see past the surface and instead get into crazy bidding wars over new products.’

As with any major purchase or project, having a clear idea of ​​costs and timing is essential. “Talk to your contractor well before you want to act and have all the supplies on hand so you can finish [the project without delays] once you get started,” Ms. Lautz said.

Especially for those weighing their options between selling or committing to upgrades, a project can be a big undertaking, but given the current state of the market, “[Owners] might feel more comfortable working than trying to put their home on the market and playing a game of musical chairs to find the next perfect property that meets their needs,” Ms. Lautz said.

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