With rising property prices and the acquisition costs not getting any cheaper, more people are turning to staying put and renovating. But how do you reach that decision?
Before you decide what is best for you (and everyone is different) let’s cover off some basic details about borrowing the money. Lenders generally classify anything over $100,000 to be major works and you will need a fixed price building contract from a registered builder and potentially council approved plans and permits.
A common scenario we see is a client with a single-fronted property in Melbourne’s inner-suburbs worth around $1Mil. This little 2 bedda has been great for the past few years for life as a working couple or has allowed the arrival of a baby. It’s close to everything from a lifestyle perspective; cafes, pubs and the CBD.
However, as the thought of expanding the family becomes a reality, the 10sqm of land out the back and small living area is getting a bit cramped. Do we go up and put our bedroom there with an ensuite and keep the kids downstairs? Or do we sell and go further out where we can afford a double-fronted 4 bedroom home?
Sell and buy something else?
You can sell and upgrade – it may not be in your current suburb, but one or two suburbs further out – this may still be OK? Using the example sale price of $1 million, you will have selling costs of approx. $25K – $30K which is made up of the agent’s commission and advertising costs.
Upgrading to a larger property means you will probably need to spend around the $1.5 million mark. And of course, you need to add in stamp duty and other associated costs to the purchase price of approximately $85K.
End result, you have dropped $110K – $115K to move out of that great lifestyle house and into a bigger place, maybe further out than what you are used to.
Renovate and stay put?
Renovations aren’t cheap, but with shows like The Block, more and more people are choosing this option. It can really pay to look outside the box first; good interior design can create places and spaces that you may not have thought of as stylist Ali Waight explains later on in this update.
For clients choosing the reno option, they may spend anywhere from $250K up to $700K for an extensive renovation. If we stick with the single-fronter example above, the decision is about whether to build up or stay on one level.
To help paint the picture further, the Entourage team is currently working with a client on a $450,000 renovation loan for a single-fronter and they are adding an extra storey. First step is to get your lender to value the completed renovation based on the building contract, outlying the plans and specifications. Next you will need a valuer to place an estimated value on the property as if it’s complete. This is called an “As If” valuation and they are generally pretty conservative as the valuer is basing his estimate off drawings.
Once this value has been determined, the same lending rules apply; you can borrow 80% against this end value. The building contract will normally be broken up into 5 or 6 stages and as your builder progresses through the project, your lender will pay the builder directly from the invoices received.
What if you are an owner builder?
Be very careful of this. If you are thinking of doing this, contact us before you get too far as banks DON’T LIKE owner builders. Some of the big 4 banks, don’t even look at them which is a good indication as to how much they are frowned upon. If you have the cash upfront to pay for the build – great! But if you are wanting to borrow for the build and progress as an owner builder then be prepared for the many hoops lenders will ask you to jump through.
So what should you do?
This is a big decision and remember, there is no ‘one-size-fits all’ here. There are a lot of factors to consider; many of them financial and some of them are definitely lifestyle-based. To reach a decision about renovating or relocating it is really important to talk to experts about your options; paint each scenario in detail, ask heaps of questions and you may well be surprised how the solution rises to the top.
Contact Entourage Finance today to have an expert help you understand what you can do and help you with your best options available when deciding weather or not to renovate or relocate.