Renovate or Relocate? Now That Property Values are Recovering

With baby no. 2 on the way, Jonathan and Andrea Hildebrandt had to face an expensive reality. They needed more room.

Their home had only two bedrooms, and nowhere for their 2-year-old to play without waking up her future little brother. Moving didn't seem viable. The family loved their Queen Anne neighborhood in Seattle, and given that home prices had fallen 20% since they had bought four years earlier in 2007, they doubted they would recoup the $530,000 they paid. So they started talking seriously with builders about refinishing their basement or adding a second floor.

Those conversations came to an abrupt halt, though, when the Hildebrandts found their perfect house, a $618,000 three-bedroom just blocks away.

When they got a $520,750 offer two days after putting their home up for sale, they decided to move. "We essentially got the house that we would have ended up with 18 months later, but for a third of the cost," says Jonathan.

A RELOCATION BALANCE SHEET

What the Hildebrandts gained in the move:

Square feet: 1,000
Bedrooms: 1
Baths: 1
What it cost them:

Sales price of the old house: $520,750
Cost of new house: $618,000
Sales commission: $32,000
Closing costs: $1,900
Moving: $1,200

To move or to improve? For the first time since the housing market went bust, homeowners are seriously contemplating that question.

Until recently, selling a home was a dicey proposition. Even those who were lucky enough to find a buyer often walked away with far less than the home's previous value, and in some cases even less than what they owed the bank.

Owners also put off renovation projects, causing home-improvement spending to fall 16% from 2007 to 2011, says the Joint Center for Housing Studies of Harvard University. Little wonder -- who wanted to sink more cash into a home whose value had already plummeted?

Now the market has turned the corner. Houses are selling faster, and prices are climbing. In a Coldwell Banker survey, 82% of agents said they expect more home shoppers this spring, singling out trade-up buyers for playing a "significant role."

Remodeling, too, is surging as owners, reassured by rising property values, tackle postponed projects. Spending on improvements hit $131 billion in 2012, its highest mark since 2006. "There seems to be a lot of pent-up demand," says Paul Sullivan of the Sullivan Co., a Newton, Mass., remodeling firm.

But just as today's market looks nothing like it did during the bubble, the decision to list or fix your home has changed dramatically. Buyers have become more conservative. The recovery is progressing unevenly, so where you live can have a huge impact on your options. And a limited supply of new homes means the relocation pickings are slim.

Are you grappling with the decision to fix up or trade up? Consider these factors, and ask yourself five key questions.

MOVING: Is selling a realistic option?

Start by assessing the prospects of your local housing market. While the biggest rebounds have come in places that were walloped by the real estate crash, they're not necessarily the best bets for long-term gains.

Instead, experts say, many buyers are gravitating toward areas with key quality-of-life features. Good school districts have long been equated with strong home values, says David Figlio, director of Northwestern University's Institute for Policy Research, adding that "people pay more attention to these things during times of tighter housing values than they do in go-go periods of real estate."

The far-flung exurbs thrived in the boom years, but now an easy commute drives sales. "People want to live in closer to the city and in more walkable neighborhoods," says Jessica Wilkie, an associate broker at M Squared Real Estate in Washington, D.C.

To see how your neighborhood stacks up against others in the area, compare three key metrics: price increases, speed with which homes are selling, and inventory of places for sale (you want a number that's higher than that of nearby neighborhoods for the first two, lower on the last).

You can ask a community real estate agent to run these statistics for you, or do your own investigative work on Trulia.com or Zillow.com, both of which have tools for making comparisons. If your area fares better than those around you, you're in a good position to sell.

Are you among the 22% of homeowners with a mortgage who, according to real estate research firm CoreLogic, are underwater, or one of the 23% who have 20% or less equity in their homes? If so, your choices are limited.

Even if you can sell, you will probably walk away empty-handed, or at least without the 10% to 20% cash needed to put down a deposit on a new place. Renovating is the better choice. Assuming that it will cost you less than moving, that you plan to stay in your home for at least five years, and that you can pay for the project without borrowing, it's a good bet for improving the long-term value of your home.

Lisa and Josh Herman's Palm Springs three-bedroom was recently valued around $300,000 -- a far cry from the $495,000 they paid in 2008. Still, with two kids, the Hermans could no longer live with the home's open floor plan. "All you saw when you walked in the front door were toys everywhere," says Lisa.

Rather than sell at a loss, the couple opted to pull together $20,000 in savings and bonus money and started updating their bathrooms, converting an office into a fourth bedroom and turning their formal living room into a space for the kids.

The project's nearly finished now, and the Hermans say it was money well spent. It may take years for the market to get back to pre-bust levels, and that's fine, says Lisa: "I think we'll be happy here for a very long time."

Next: Is remodeling the better choice?

REMODELING: Can you renovate your way to the house you want?

During the boom many people threw the old "don't over-renovate" rule out the window, assuming they could make their home bigger and fancier than those of their neighbors and still make a profit when they sold.

Now, agents say, buyers are focused on features that fall within local norms. "If you're thinking of doing a gourmet kitchen but you live in a modest neighborhood, you're unlikely to recoup your investment," says Jessica Riffle Edwards, an agent with Coldwell Banker Sea Coast Advantage in Wilmington, N.C. To see what features work best in your area, ask an agent for a market analysis. A good pro will do this for free, knowing it could mean future business.

You'll also need to determine what changes your house can practically accommodate. A contractor should evaluate your home in person, says Judy Mozen, president of Atlanta-area remodeling firm Handcrafted Homes, to be sure you have the necessary structural support for the project. Keep in mind that certain changes, like adding a story or digging into bedrock, often rack up unexpected costs.

Whatever your house can handle, remember that if your goal is attracting future buyers and boosting your home's value, the bigger projects are less likely to pay off. Adding a high-end master suite, for example, costs an average of $220,000 and recoups just 52%, according to Remodeling magazine.

So what adds value? Simpler, more practical projects, like finishing attics and basements, says Mozen. On the other hand, if you are planning to stay in the home long-term and are less focused on recouping your investment, a large project that allows the home to better fit your needs may be worth the money, says Abbe Will, an analyst at the Joint Center for Housing Studies.

BUYING: Is the house you want for sale?

Another factor to consider is whether the kind of house you want, in the neighborhood you want it, is even out there. Housing inventory is tighter than it's been in eight years, according to the National Association of Realtors. In some cities, such as Sacramento, there's just a one-month supply of homes for sale. (Nationwide, there's a four-month supply. A healthy market typically has a six-month supply.)

To find out what's available, devote a few weekends to hitting the open-house circuit. Even if you don't end up buying, you may come away with renovation ideas, says broker Wilkie.

The search is likely to be particularly difficult if you're looking for a type of home that's unusual in your market.

Bao Bui and Mike White discovered how frustrating this can be when they started looking for a small but well-appointed house in Fayetteville, Ark. They'd lived in their 1,600-square-foot home there for years, but after making countless little upgrades, the couple realized that no amount of tinkering would make up for the nonexistent garage, closed-in kitchen, and tiny closets and bathrooms.

When they looked into moving, though, all the houses that fit their criteria were too big and selling for more than double the $225,000 they could get for their place. "The house we wanted basically didn't exist," says Bui. Determined to stay in their beloved neighborhood, near White's job as a controller at the University of Arkansas, they're now in the process of gutting their house, adding nearly 400 square feet and turning it into something "very modern," with a garage, a more open floor plan, and an expanded master bedroom.

All told, the $250,000 project will cost as much as moving, "but we'll have exactly the house we want," says Bui, adding that they plan to stay in the home for the foreseeable future.

A RENOVATION BALANCE SHEET

What Bui and White will gain from their remodel:

Estimated value of home pre-renovation: $225,000
Post-renovation: $325,000
Square footage added: 377
What it's costing them:

Construction: $223,100
Architectural fees: $22,350
Six-month apartment rental: $5,220
Estimated project duration: 180 days

PRICING: What are the hidden costs?

It's no secret that many remodeling jobs end up coming in overbudget.

To get the most accurate estimate, do your own research on the types of materials and finishings you want to use. You may pick very different items -- with very different prices -- than your contractor would otherwise include in the bid. Shrink that number further by negotiating. Indeed, a recent Angie's List poll found that 80% of contractors said they were willing to drop prices to get a job. Offering to pay subcontractors directly or being flexible on timing may help bring down the bids, says the site's founder, Angie Hicks. And once you've settled on an estimate, build in an extra 10% to 20% to cover any unexpected expenses.

One big cost that would-be renovators may forget: temporary housing. For the Hildebrandts, that became a big factor in opting out of a renovation. Not only would a second-floor addition have cost more than $200,000, but the family would have been forced to move out of their house for close to a year. "That seemed like an incredible hassle on top of the money we'd be spending for renovations," says Jonathan.

When they totaled the full renovation cost and compared it with the price of buying a new home that was only $100,000 more than what they got for their old house, moving started looking like a bargain.

Of course, people also tend to underestimate the price of relocating. If you're planning to sell one home and buy another, plan to pay real estate commissions (generally 6% of the sale price) and closing costs (an average of $3,754 on a $200,000 mortgage, says Bankrate.com). Even relocating nearby can be pricey; hiring pros to move the contents of a four-bedroom home a few miles away typically costs between $1,000 and $2,500.

Will your new home need sprucing up? Buyers spend an average of $3,300 on small improvements during their first two years in the home, according to the Joint Center for Housing Studies. And that doesn't include immediate expenses, like new blinds, cleaning supplies, even replacements for the fridge and pantry items that got tossed in the move.

WAITING: What does your gut say?

Finally, don't force yourself into a decision that really doesn't feel right. The housing market is still in a state of flux, and you could find yourself in a very different position in, say, six months or a year, when prices may be higher and more homes will likely be sporting FOR SALE signs. Indeed, for some the answer to the renovate or relocate question might be "sit tight."

Aaron Rozeboom and his wife, Lina Walker, recently came to that very conclusion. When the couple had a son last year, they considered selling their three-bedroom in the Washington, D.C., Capitol Hill area and looking for a bigger place. After realizing just how much they would have to pay for the extra space and how competitive the local market is, they started leaning toward renovating their basement.

The catch: The neighborhood schools aren't great, says Aaron, though that could change soon. So for now, he says, "we're going to wait and see."