Would it be prudent to build a room addition at this juncture?
January 10, 2011 8:33 AM   Subscribe

Would it be prudent to build a room addition at this juncture?

My wife and I have a combined gross income of $80k. I am an IT worker and she is adjunct faculty. We have no kids. In 2005, We purchased a small suburban house at typically high 2005 prices. Our house is 900 sq ft, which is too small for us and all of our stuff. Comparables now go for half what we paid (they are foreclosures) and 10% of the houses in our neighborhood are forclosures, so selling our house is not a realistic option.

My brother-in-law, who lives in a different country and has a somewhat crazy wife, has sent us 100k over the past few years and asked us to invest it in real estate. We didn't really feel like taking on the work and the risk of being landlords, so with his approval, we used it to pay off our mortgage. Yay! Six months later, we have saved up $60k.

We would like to build a room addition onto our house. The room addition would be either be 432 or 576 square feet. We are being quoted $156 per square foot including concrete (our house is on a slab), carpentry, drywall, utilities, everything. This works out to $70k to $90k. The contractor did a room addition for a friend of mine and his work is beautiful! We've talked to the municipality building code people and our plans are allowed.

To raise the needed money above what we have saved (and what we will be able to save by the time construction is finished), we would put it on 12-month interest-free credit card intro offers until we pay it off. We did this with our car and it worked out great. Unless BIL feels the need to send some more thousands our way. We have sent an email to BIL asking his approval for our plan.

Now the questions: Is this a prudent time to build? We figure that with demand for construction low, costs should be cheaper. However, there is lots of talk about the dollar crashing which makes me nervous about the economy. However, it's better to have your money in durable goods, right? One alternative would be to move to a different house, but we do not relish the idea of taking a $100k loss on our house and hoping that the next house would be similarly discounted --- and since we would be moving to a more desirable neighborhood, it probably wouldn't be.

I am highly risk-averse when it comes to my house. Any advice generally?
posted by anonymous_account to Work & Money (11 answers total)
Do you have good retirement savings? If yes, then go ahead and do it. Now doesn't seem to be a good time to move house, so you are making your everyday lives better by expanding your house, and sometime down the road when you choose to sell, you are making your house easier to sell, by making it more desireable (not that you will necessarily get your money back, just easier to sell).

If you don't have good retirement savings, you should consider whether that would be a better use for your money, long-term.
posted by Joh at 8:45 AM on January 10, 2011

Frankly, that doesn't sound like a prudent plan to me. First off, if 900 sq ft houses are going for $40k in your neighborhood and you're thinking about sinking $70-90k into the addition, surely you could find a ~1500 sq ft house in your neighborhood (or even a nicer one) for the $100+k you would have if you added the current selling value of your house plus whatever you could put together in cash between now and when you sell your house (let's say 6 months to a year--would your addition be completed any sooner than that anyhow?). If you wanted a bit more than that to spend, you could just get a small mortgage and wouldn't have to worry about rolling over interest-free credit card debt (how well will that work if either of you get laid off or get hours cut?). You also wouldn't have to devote time to planning/live through a remodel.

Looking at it another way, how can it make sense to spend 200% of the value of the house itself to increase its square footage by 50%? Shit--you could buy two of your neighbors' houses with that same money and you would TRIPLE your room to store your stuff.

Don't let the loss on your house's value cloud your judgment. The house has lost value whether you sell it or not.
posted by SomeTrickPony at 9:02 AM on January 10, 2011 [1 favorite]

Investing in property is not going to make you (or your brother-in-law) any money in the short term. That much is reasonably certain. You can bet on property values rising in the long term; many people do, and historically it has tended to work out. But only you can decide whether that's a bet you're willing to take in the current economic climate.

I think you need to focus on whether you're going to stick with this house in the long term, and whether this piece of building work is going to sufficiently improve your lives to make it worth the money. Try to think of the potential added value as a fairly minor secondary thing - something that may or may not make you money ten or fifteen years from now. Allow for the possibility that you may not even get back everything you spend. Is the extra space still worth the price?

And if you haven't done so, you really need to get some sort of legal documentation regarding what percentage ownership your brother-in-law has, and what responsibilities that entails (i.e. does he pay for a percentage of future work and building maintenance, a share of insurance, etc.? Does he get back a percentage of the value of the house when you sell? Or what?). Don't risk a future family rift over something like this.
posted by le morte de bea arthur at 9:02 AM on January 10, 2011

156 a square foot is not a bad price if it includes a bathroom. Extra space doesn't add value to a house near as much as extra kitchen and bathroom space does. I am going to assume this amounts a master bedroom addition, in which case 156 isn't too bad, but not a great, price. If you are getting truly high quality work done then it is probably worth it.

Don't worry too much about the dollar crashing. It is just adjusting to a more realistic value in light of our trade and budget deficits. Their really isn't a good alternative currency out there (mabye the euro but it has its own problems). In general don't but too much stock in the doom and gloomers on the economy-it is rough now, but getting better and probably starting to accelerate. As for the rest I totally agree with Joh above
posted by bartonlong at 9:07 AM on January 10, 2011

Could you rent out your house for near your mortgage or close to it? And then buy elsewhere?

Also, how much do you love your neighborhood? How awesome is the location? Do you want to live there for another few years just until the market rebounds (who knows about that, right?) or is this your home for life?

Husband and I live in about the same size house -- 2 bed, 1 bath. Us plus new baby. The second bedroom is currently home office (I work from home) plus guest bed plus baby stuff. Can you guys pare down your stuff to make 900 sf work better for you? If you can't -- how much space/time will an addition really buy you?

Things to think about. It's really hard to say without knowing more about your particulars and without a crystal ball to see into the future. That part you've just got to go with your gut!

In our situation, which is very similar, really. We have decided to stick it out in our neighborhood and hope for the market to come around a bit in the next few years. We've realized that doing too much to our house would price it out of the neighborhood it's in. It's a nice house -- it could be nicer but then, I feel, it would be too expensive to sell here.
posted by amanda at 9:30 AM on January 10, 2011

Response by poster: > 156 a square foot is not a bad price if it includes a bathroom

It does not. Bathroom is tiny and will remain so. Our current home has no dining room. we are adding a family room, dining room becomes a family room, adding master bedroom, current small bedroom and laundry nook become a combined walk-in closet/laundry room.
posted by anonymous_account at 9:30 AM on January 10, 2011

I wouldn't advise it, especially since you say you're highly risk adverse when it comes to your house and the market in your area isn't recovering. It may someday or it may not. I'm of the "don't throw good money after bad" philosophy when it comes to real estate.

You were smart to pay off your mortgage early -- you've saved yourselves thousands of dollars in interest payments and now have a nice nest egg saved up in case either of you loses your job or some other financial calamity strikes.

Instead of pouring more money into a house you say that you'll eventually be moving from, keep saving, and either put it away for retirement or use it for your future home. Make the best of your current situation by culling your possessions and making smart use of the space you have. Sites like Unclutterer and Apartment Therapy are really helpful with this; and the Not So Big Remodeling book by Sarah Susanka is full of great advice as well.
posted by LuckySeven~ at 9:34 AM on January 10, 2011

You'll also need to figure out if adding the ~50% more square feet to your house will overimprove it, relative to the other houses in the area.

Ultimately, I'd vote not to do it, as selling a ~1,400 square foot house with one bathroom is going to be harder than selling a 900 square foot house with one bathroom.
posted by yellowcandy at 10:01 AM on January 10, 2011

We are in about the same size house and we do have kids. I would add-on in a minute if we were in as good a financial situation as you are. We are very uncluttered but the layout of our house makes family space very limited. We also have only one family/living room and no dining room. If I was going to add on, I would make the kitchen table area (our only dining space) part of the kitchen (yay, bigger kitchen) and the build-on would include a dining area and enlarge the living room. We already have 2 bathrooms. Since moving is not much of an option for you - you'd take a loss - you should make the house work for your needs.

Two caveats:

1. Make sure you're not turning your house into the biggest house in the worst neighborhood. When we shopped for houses, we chose the smallest house in the best neighborhood. Buyers know that they can't change things like how nice the neighborhood is, so if you become the most expensive house in your area, buyers will likely use the same amount of money to buy in a different neighborhood.

2. You probably already know that you won't get your money out of the addition when you sell. Buyers expect a decent-sized living room, and they expect a dining area, so they won't be willing to pay more for a house that has these. They'll pay for the square footage, of course. It's stuff like extra bathrooms that get a higher return on your remodel dollar.

I'm telling you these things because it's what my husband and I discuss for our own situation every time the idea of an addition crops up. But since you are not thinking of moving soon, your own needs weigh just as heavily as what buyers want. I'd do it.
posted by Knowyournuts at 10:48 AM on January 10, 2011

No. Not prudent. Or as Suze Orman would say "Denied!"
posted by FlamingBore at 2:31 PM on January 10, 2011

Since selling your house is not a realistic option due to its location, spending $90K on an addition means you will never be able to get that money back. Consider that since your house is in a bad location, a location where houses are unsalable and 10% are in foreclosure, the new room addition will also be in a bad location. Would you build a new house in your current neighborhood? Probably not. So why build a new half-house there?

You'd probably be better advised to use the money you have as a down payment for a larger house in a better location, and then try to rent out your old house.
posted by Protocols of the Elders of Sockpuppetry at 8:04 PM on January 10, 2011

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