How to Decide Between Extending Your Current Home or Moving

For most home owners, this binary choice between staying and going is needlessly agonizing. Broken down to a series of six decision gates, the correct choice often reveals itself long before you spend a cent on agents, or architects.

Gate 1: Run the real cost comparison

The single biggest error is to compare your extension quote to your purchase price and stop there. Moving has a long tail of costs that aren’t immediately apparent. Stamp duty alone on a $1,000,000 property in Victoria is $54,550 (State Revenue Office Victoria).

Plus the agent’s commission (1.5-2.5%), marketing, legal costs and removals plus works to the new place. All told, it’s easy to be looking at between $80,000 and $100,000 before you’ve bought a single rug.

By contrast, for an extension, you should always add a contingency to whatever quote you get. As a rule of thumb, add 10-15% to anything a builder says to get their true price, if you want the work done on time. The contingency is there to cover the things he couldn’t see when he put in his bid. It might reflect poor ground conditions, works needed to make things compliant with council regulations, or even changes to the building lines after permits have been issued. All of these things happen, and a $200,000 extension quote becoming a $220,000-$230,000 budget is not unrealistic.

Gate 2: Put a dollar figure on location

Your spreadsheet does not capture everything. Things that can’t be captured, but you should still consider, are things like school zones.

If your current address puts your children in a school that you would have to double your budget to repeat, work out how much an equivalent house in that zone will set you back. If you have a daily 20 minute commute and every other house in your budget range adds an hour to either end of that, that is a huge cost, or opportunity cost, in both cash or time over the long haul. The same goes for elderly relatives, friends, a sports club, or a garden that has been nurtured over many years. The value of your current location may not be immediately apparent to you, but it has value, and if you knock it down to buy a “new and better” home, that value may be gone forever.

Gate 3: Check what council will actually allow

This is a step that people constantly overlook, and it’s the single most expensive error to make.

Before you sign off on a design concept, get the relevant council overlays for your block. Heritage overlays will often dictate what materials you can use, or if you can add a second storey at all. Setbacks will determine how far back you have to build from the street, and the shape of your block will determine what you can do with it. You don’t want to invest in a set of plans only to find that the design you like simply cannot be approved. Most councils will post their planning schemes online, and a town planner can usually give you an indication of what changes you can expect for a given design, for much less than a designer’s hourly rate. Always ask them to review the planning implications for you before you invest in detailed designs.

Gate 4: Pressure-test your financing

Don’t fall in love with an scenario before taking your financing offer to the bank.

For an extension, the question is how much equity you can borrow against your current property, and how much the bank will lend you for the improvements. The final value of your property will dictate the loan amount, but note that many lenders do not fund 100% of improvements. In practice, your loan may only cover a proportion of the works, as a completed extension, renovation, or additional building may not always fetch the price you expect in a given suburb. The difference between what you spend, and what the bank will lend you, is always money you need to come up with.

For buying, get a pre-approval on your finances well before you start looking at homes. Your borrowing power may turn out to be significantly less than you anticipated, particularly if you intend to buy with an existing mortgage to discharge, rather than buying outright.

Gate 5: Compare the timelines honestly

Both options take time. It all depends on the type of time-pressures you are under.

For instance, a straightforward renovation will take between 3-6 months, once underway. Design and documentation will take another 2-4 months in advance of starting on-site. Council approvals are always a factor, and may add a further 6-8 + weeks, depending on the local government area. The time between engaging an architect and occupying one of the renovated rooms in your home is often between 9-15 months. This period may be completely debilitating if you try to stay on-site and live in the midst of the construction, or it may be spent living out of a suitcase, or in an entirely different home. The opportunity cost of time may be high if you need to change your lifestyle during this period, or if you have to rearrange your working life around the build for much of a 12 month project.

Buying has its own timeframe, dictated by auction cycles, and the possibility that you may be outbid several times with no viable alternatives available. Settlement is another factor, and it may add further time to the mix. Neither option is quick, but which time-pressures are more acceptable to you at this time?

Gate 6: Get a builder’s reality check before full documentation

An architect’s plan is a dream. A builder’s cost is a reality. The difference between the two can be huge, depending on the works contemplated. Two similar builds can vary in price by tens of thousands of dollars, for the same design, due to ground conditions, or site access. A narrow build site will incur different costs to one with more space, and a builder will require different equipment if he has to contend with reactive clay soil, common in Victoria. If your ground conditions are marginal, the extra charges for footings and excavation may need to be factored in the initial quote, if your builders are to complete the work on time. This is a conversation to have with local builders, or specialist extension providers such as house extensions melbourne, before you spend any money on full documentation. Having an indication of build costs at the sketch design stage is always a good idea, since this sets the spending parameters for the rest of the build.

How the gates work together

Each of these items can be considered a gate, in that it is a point at which you can stop and reconsider your options. It’s always possible that after the second gate, you may decide that moving is the only option, due to the value of your current location. Or, after the third gate, you may decide that buying a new place is the only realistic option, due to land constraints. If you proceed with this analysis in this order, you will never waste money on decisions you have already made. The home owners that always get themselves in knots are the ones that start from the design and work backward to justify a budget. Always start with the budget, and a realistic assessment of what you can afford before you spend a cent on design work. The order of these items is more important than any of them individually.