- - Thursday, October 25, 2012

Is it better to renovate or rebuild? This question is not as simple as it may appear — financially or logistically. Real estate professionals agree that each situation is unique, but they offer some rough guidelines to help make the decision.

“If the houses in your grid are selling for two to three times the value of the house you live in, the economics work for a tear-down,” said Brian Hickey, president of Teardowns.com, an online marketplace for the transactions of redevelopment properties. “If the Realtor is telling you that your home will sell for $400,000 but the neighbors have homes worth $1.2 million, you’re a good candidate for a tear-down.”

Mike Theide Jr., project manager and part owner of Bethesda Contracting in Chevy Chase, pointed out that the most sought-after renovation of homeowners in the Washington area is a two-story addition in which the kitchen and/or living room is expanded on the first floor and a master suite is built upstairs.

“Very roughly speaking, these cost between $200,000 and $400,000,” he said. “Obviously, you can’t build a new house for that amount, but if you want to go much more beyond that in terms of renovations, it may make sense to rebuild.”

Architect Susan Pierce, founder and co-owner of Commonwealth Home Remodelers Inc. in Vienna, agreed that everyone wants a new kitchen and master suite.

“Those can be added onto the existing house,” she said, noting that once renovations start exceeding $450,000 or $500,000, homeowners should start to consider tearing down and rebuilding. “A brand-new house doesn’t cost much more than that.”

The real estate professionals agree that renovations often cost more per square foot than new construction. Ms. Pierce said economies of scale come into play with new construction and that it takes more time and care to undertake a remodeling project.

“With renovations, you must demolish what you have very carefully versus going in with a bulldozer,” she said.

Mr. Theide pointed out that working around older structures can be difficult and expensive.

“You have to tie into the existing systems, and you can run into problems — usually with the plumbing and heating systems — in terms of working with radiators and drain lines,” he said.

He recommends setting aside an additional 5 percent of the total budget to allow for unforeseen conditions.

Mr. Hickey said this is particularly true of older homes.

“You don’t know what is behind the walls,” he said. “Open it and find a problem that wasn’t in the budget.”

John Mentis, a real estate agent with Long & Foster in Arlington, agreed that new construction often is less complicated.

“You’re starting from scratch with a blank slate — put the wires and pipes where they need to be rather than try to work around what’s already there,” he said, adding that he is not surprised by the number of people who massively remodel their existing homes or even tear down and rebuild on the same lot.

“People are choosing to do that because they have a routine that really works for them in that particular area,” he said. “It comes down to things like the commute to work, the school district, the amenities of that location — parks, Metro, retail — they believe they can’t get that anywhere else.”

Mr. Mentis said the births of babies aren’t the only reason families may need bigger homes.

“We’re seeing the trend of multigenerational families with elderly parents moving in with their adult kids, as well as adult children coming home to live with Mom and Dad because they’ve hit a rough patch in their careers,” he said.

The phenomenon of buying older homes with the intention of razing them to build new homes is common in the Washington area, Mr. Mentis said.

“As we get closer and closer to the city and into the District itself, we don’t have open lots,” he said.

More lots are for sale farther from the city, he said, but many people are not willing to make a long commute.

“The Washington market has a great deal of interest in new construction and can also afford homes priced at $1 million or more,” he said.

Many of the smaller, older homes in the Washington area are good candidates for tear-downs, Mr. Mentis said.

“They’re hard to sell because not many people want a three-bedroom, one-bathroom house,” he said. “In the ‘30s and ‘40s, the whole family used the same bathroom, but that’s functionally obsolete today.”

Mr. Hickey said families “want open floor plans with lots of windows and light. No one wants to live in Grandma’s house.”

He also said basements in older Washington homes have problems. “They’re unfinished cellars that are damp and have low 7-foot ceilings. People want their basements to be a great room with 12-foot ceilings so the kids can play down there.”

Ms. Pierce said that opening up floor plans and replacing windows for better light are easily accomplished remodeling goals.

“That’s been our bread and butter over the years,” she said, adding, however, that low ceilings are an issue in older homes, especially as Americans get taller. “If you don’t like the 8-foot ceilings throughout the house, that’s not a remodeling job — that’s a rebuild.”

Fortunately, construction loans are not as difficult to obtain as they were a few years ago, Ms. Pierce said.

Ray Friday, senior vice president of the Greater Washington area for Southern Trust Mortgage in Vienna, said the real estate market in Northern Virginia has experienced 34 months of appreciation, “so we feel confident making these loans.”

He said another trend is that homeowners, rather than builders, are coming to the bank for construction loans. “From the bank’s perspective, there’s less of a risk to these types of loans than loans to a builder.”

Lynn Pulford, mortgage division manager for Sandy Spring Bank in Columbia, Md., said her bank also sees fewer builders fronting the funds for tear-downs and rebuilds.

She said banks prefer to lend to homeowners. “It’s not speculative lending,” she said.

Homeowners must notify the bank of their intent to tear down a house, whether it’s on a property they are looking to buy or it’s their existing house, Ms. Pulford said. “The loan could wind up in default if they don’t make their intentions clear,” she said, noting that in the case of a tear-down, it’s not necessary to have a home inspection and termite inspection.

Before going to the bank to discuss intentions and loans, homeowners should consult with an architect or builder to understand the local zoning laws.

“The local jurisdiction may be the city or the county or both, but you must have proper approval to make sure that what you want to build there is within the law,” Ms. Pulford said. “The current house may be 2,400 square feet and you hope to build a 4,000-square-foot house, but zoning may not allow that, or you may not be approved to put in a new septic system.”

Ms. Pierce noted that every jurisdiction has its own rules about construction in terms of setbacks from the sidewalk or road and space on either side of the neighboring houses, as well as height restrictions.

“In Vienna, you can’t build out more than 25 percent of the lot, so if you have a quarter acre, that’s 11,000 square feet — 25 percent of that is basically a 2,500-square-foot house — that’s your buildable footprint,” she said, adding that height restrictions often limit houses to two stories.

Once homeowners have their architectural plans and a signed contract with a builder, the bank will calculate the loan based on the current property value of the lot and the appraised value of the finished house, Mr. Friday said.

“Most banks ask that homeowners put 20 percent of their own money into the deal, and they must have reserve capital to handle change orders and unforeseen circumstances,” he said. “Renovation loans are similar in that the owners must get their plans together and must have a signed contract with the builder. But they can use their equity in the house for their loan-to-value calculations based off the future value of their newly renovated home.”

In general, it takes six to eight months to build a house, and most construction loans are 12 months long, Mr. Friday said.

“Once construction is completed, the bank then transitions into the permanent loan,” he said.

Most banks require that construction commence within 30 days of the loan closing, Ms. Pulford said, and the funds typically are distributed in five to seven “draws” throughout the building process.

“The funds are held and dispersed based on an inspector from the bank making sure that various stages of work are completed,” she said.

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