Over the years I have had many a conversation with different families struggling to find that elusive combination in a home – a large city lot lot with a new or updated house on it. They can find beautiful new homes on smaller lots and they can find beautiful bigger lots with dated homes on them, but cant seem to find the combination of both anywhere in the city. If you looked for a new place to call home in the last number of years, I am sure you can relate. There is a solution. It takes a little cash and some disruption in your daily routine, but the end result works to accomplish two important goals – finding that perfect family home and creating equity in your long term investment.
For the purposes of this article the discussion revolves around a family shopping with a budget of around $700,000. I know this excludes a lot of people, but it is a price point in which I consistently hear complaints concerning the lack of options in the Guelph marketplace.
I like to think of Guelph like Oakville or Burlington was 15 years or so ago. You could head to the suburbs and buy a new home on a smaller lot or you could buy a home in need of some updating in the more core area of those cities. A number of family and plenty of progressive builders started to focus on the core areas and buy up older homes on big lots and start putting major renovations on them. This is happening here now, and it is a whole new way to look at this price point.
I am sure you have done the research, but if you haven’t, do a little searching around to see what 700k gets you in the current marketplace. There are some great new home options on 40 or 50 foot or smaller lots and there are infrequently well updated homes on more mature lots that come up in the resale market. The process can be frustrating to know you are spending such a large amount of money on a home, and not getting exactly what you want.
The answer I like, is to buy an older home on the lot you want and completely renovate it to your taste. Older homes in great family oriented neighbourhoods with big beautiful lots is something that Guelph has plenty of. A whole new world of possible areas and homes to purchase become available to you.
Initially a lot of families discount this option, not because they are scared to head down a different path, but they honestly just don’t know where to start the process. Costing items like structural additions, new mechanical and electrical systems, all new plumbing, kitchens and flooring can be troublesome to accurately calculate for most people. How does financing for something like that work? Where will my family live during renovations? Tough questions to figure out on your own. This process definitely takes some more patience and planning than buying a new or resale home and just moving in and chipping away at some projects.
I want to address the five major issues with doing this type of renovation project that pretty much applies to everyone’s situation.
- Will the bank work with me for financing on a renovation?
- Can we live in the house during renovations?
- How much will all of this cost me?
- Which builder/renovator should I choose to work with?
- What will my house be worth after it is all completed?
Will the bank work with me for financing on a renovation?
The answer is maybe, but likely not. The best work around with this is to move as little money forward from your previous home sale as possible into a new mortgage and leave as much behind to use as a bankroll for the renovation project. At the end of project you can remortgage the entire package if you like.
Here is an example:
Your current house you sell for $450,000 and after mortgage discharge and all costs of selling you walk away with $200,000 to move forward to your next home.
The new home you want to renovate you pay a purchase price of $500,000. Instead of applying that complete $200,000 towards the new home, you take an 80/20 loan to value mortgage and plunk $100,000 down on the new place. This avoids CMHC fees and leaves an extra $100,000 set aside for renovations. This will certainly get you well started into your renovations. The other upside of this type of endeavour is discussed a little more in the fifth point, but the goal here really is to create some serious equity in the home by taking on this project. This will allow you to extract a little more equity at the end of the day to pay for the end of the renovation if needed.
Most likely, you will have to be your own bank.
Can we live in the house through renovations?
Wish I had a better answer for this one. If you are doing major things like additions or taking the roof off, the best answer is no. Almost any major renovations will require dusty demolition and a lot of noise that probably shouldn’t be lived through. We renovated outré family home, it was the in-laws who dealt with us in their space for 5 months. Other than being forced to watch Dancing With the Stars every week, it was actually a great bonding experience for everyone. The majority of families that we have worked with on this type of arrangement end up with some sort of family member.
The rental option does exist as well. Short term rentals can be hard to find, but there are some options out there. Obviously any money you are spending on rent doesn’t go towards your renovation.
Find a housing solution, staying in the house isn’t really a great option through major renovations.
How much will all of this cost me?
Well the answer to this obviously depends to what extent you are doing renovations. the answer wont be found here for that, it will be found in the next point through your selected builder/renovator once you have presented them specifications and a copy of your drawings. What us worth mentioning here though is the savings that can be realized through the renovation model as opposed to buying a new home with a $750,000 HST inclusive price tag. Some savings that really add up:
- Building permit – At the time of writing this article, large renovation permits were $0.36/square foot. For a 2,500 square foot renovation this would run around $900.00 for your permit (1). Development charges for a new home were a little over $25,000 (2).
- HST is going to be only applicable on your renovation costs as the resale home you bought to renovate is almost always not applicable to any HST taxation. Your costs to renovate will be subject to HST on both labour and materials, basically multiply your costs by 1.13 as there are no rebates. With any new home purchase in the province of Ontario HST is applicable. On a $750,000 purchase with maximum rebates in place the taxable portion of your purchase is still over $60,000 (3).
- Land transfer on the purchase of a $500,000 home would have been around $6,500. On a $750,000 home it would have been around $11,500 (4).
- The ability to shop and negotiate prices for yourself on materials and labour can be a significant savings with a renovation. In most new builds, you deal directly with the builder’s preferred suppliers or trade companies.
Of course you have to weigh these savings against the difficult to calculate costs of your time, aggravation, rent while you move out, storage fees etc.
Which builder/renovator should I choose to work with?
Well this is a personal choice of whatever company or individual you feel most comfortable with. Pricing and their vision for your project both can factor into your decision heavily. There are many great options in the city, but I personally would have my short list of potential candidates based on their experience and ability to always deliver a quality result and a great experience.
What will my house be worth after it is all completed?
I believe this is the most significant factor in choosing to do a high end renovation project. When you buy a new or resale home for $750,000 it was in most circumstances worth about exactly that. With a renovation you can create some fairly serious equity for your family’s future. One important not here too is that any equity created is going to be tax free when you sell your principal residence somewhere down the line!
Using our example of a $500,000 purchase and let’s estimate a $200,000 renovation, we have a total investment of plus or minus $700,000 into the now new(ish) home on a mature lot. So what is the house worth now? Is it worth the investment that you have into it, or is it worth considerably more now that the work has been done and you have created that elusive combination of a new home on a mature lot. In all of the high end renovation projects I have been involved with over the years, including my own home, the answer is almost always much more than the sum of the invested dollars.
If you placed your home on the market after it was completed would someone be willing to pay you a lot more than you have into it? Depending on what type of improvements you made and assuming you didn’t create a home so unique that most buyers wouldn’t be interested in buying it, the answer should be yes. You have created something unique in the marketplace which will always attract attention. A purchaser has the option to buy your home or try and replicate the process which you successfully completed. Not everyone is up for that and would happily pay you for the end result. What also gets lost in your asking price is how much money you spent on the renovations. Most buyers don’t have an accurate grip on what those figures would be, they just know it would be a lot. I have seen completed renovation appraisals in excess of $200,000 higher than the actual investment. That is some serious equity that has been created.
One important note to mention as well is the lack of Tarion registration for a renovation. With every new home in the province this is mandatory. With a renovation project, Tarion is not involved. This can become an issue for warranty and servicing problems with renovations that have been long since paid for. Keep that in mind and be prepared to ask your builder/renovator how any servicing issues will be handled after the project is complete.
So there you have it in a few paragraphs. This option exists and is well worth investigating for the right type of people. You need to be up for the inconveniences and battles that will present themselves throughout the long process. I have seen the math work many times over and as new construction lots get smaller and smaller in this city, newer homes on larger city lots will continue to be a viable investment and a great place to raise your family.
Relevant External Links
- City of Guelph Building Permits – http://guelph.ca/business/licences-and-permits/building-permits/
- City of Guelph Current Development Charges – http://guelph.ca/city-hall/budget-and-finance/development-charges/current-development-charges/
- CRA HST New Housing Rebate – http://www.cra-arc.gc.ca/E/pub/gp/rc4028/README.html
- Ontario Land Transfer Tax – http://www.fin.gov.on.ca/en/tax/ltt/
TWTalk is a two way street – your thoughts, opinions and engagement are always welcome and encouraged.