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Without proper financial planning, those who go the reno route may find themselves running out of finances

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Jan 25, 2022 • Jan 26, 2022 • 4 minute reading time • Join the conversation Homeowners should exercise caution before selling as renovating can still be more cost effective. Homeowners should exercise caution before selling as renovating can still be more cost effective. Photo by Getty Images/iStockphoto

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In an ongoing series, the Financial Post examines personal finance questions related to life’s great milestones, from marriage to retirement.

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Most of us are spending a lot more time at home due to pandemic-related restrictions, leaving many wondering whether we should tackle a home renovation or completely change the landscape by selling.

Last year, six in 10 homeowners planned to renovate in the next two years, while 57 percent thought it was a good time to buy because of low interest rates, according to the 2021 Scotiabank Housing Poll. One-third of hotspot residents ( British Columbia, Ontario and Quebec) said they wanted to move or buy a house outside the city to get more bang for their buck.

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But experts say homeowners should exercise caution before selling because renovating can still be more cost-effective.

Chander Chaddah, a real estate agent at Sutton Group Associates Realty Inc. who has been in the real estate business for 34 years said he always starts conversations with potential clients by figuring out why they want to sell in the first place.

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“If you live in a semi-house and want a detached house, or are downsizing, that’s one thing,” he said. “But if you love where you live and love your neighbors but need more livable space, it might make sense to do a reno and stay where you are.”

If you love where you live and love your neighbors but need more living space it might make sense to do a reno and stay where you are

Sure, renos can be expensive, but Chaddah advises people to think about how much they will spend on the transfer taxes, real estate costs, and repairs that will be needed if they buy.

“When you add a second floor or finish a basement, you’re adding equity to your home and seeing the compound return on that investment over time,” he said. “Moving costs will never generate value.”

Closing costs a killer

Benjy Katchen, chief executive of Wahi Inc., a recently launched digital real estate company focused on the Greater Toronto Area, said most people buying a home don’t understand the magnitude of their closing costs until 24 to 48 hours before the deal closes.

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“They often have to scramble to come up with the extra cash,” he said.

This lack of transparency in the buying and selling process was the reason to launch Wahi.

“We’re bringing all the disjointed pieces together on one digital platform,” Katchen said. “And we want to educate consumers so they know everything there is to know and can plan accordingly.”

Most people who buy a home don't understand the magnitude of their closing costs until 24 to 48 hours before the deal closes. Most people who buy a home don’t understand the magnitude of their closing costs until 24 to 48 hours before the deal closes. Photo by Gavin Young/Postmedia

For example, Katchen said the transfer tax on a home in Toronto worth $1.3 million is $47,000, and real estate costs can be up to five percent of the price. (Properties in Toronto are also subject to double the real estate transfer tax compared to the rest of Ontario.)

“That could be $120,000 paid out of pocket on a typical sale,” he said.

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And that doesn’t factor in real estate appraisal fees ($300 to $500), a home inspection ($300 to $500), legal fees ($1,500 plus), moving expenses ($400 plus), and furniture for the new home.

“My view is that you could do that on a renovation and would at least be right,” Katchen said.

But experts say it’s also important to factor in potentially higher property taxes and maintenance costs when upgrading to a larger home.

Why renos aren’t always rosy

Without proper financial planning, those taking the reno route may find themselves running out of finances quickly, says Alim Dhanji, a senior financial planner at CI Assante Wealth Management in Vancouver.

He advises sitting down with a trusted financial planner to determine a clear renovation budget, along with a savings strategy to get there if needed.

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Dhanji suggests putting renovation funds in a short-term guaranteed investment certificate or high-interest savings account with no easily accessible penalties.

“If you have to use a line of credit or a refinance to renovate, you want to make sure you can pay off that debt over the long term,” he said. “And you always need a little wiggle room in case things don’t go according to plan.”

A home renovation spiraled out of control for Dhanji when one of his contractors left work to take a better-paid one.

“It’s important to have a contract with your contractor and withhold at least 20 percent as an advance so you have some sort of recourse if they don’t finish the job,” he said.

In his case, the commission was used to bring in a new contractor who successfully completed his renovation.

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No

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Since no one really knows where the housing markets are headed, it’s too risky a business these days to renovate or buy to resell, Dhanji adds.

“You have to think, can I live here for the long term and manage the cash flow long term if I need to?” he said.

Above all, be prepared to be involved in the renovation. Even with a project manager, those going through the renovation process have to prepare for a stressful and sometimes all-encompassing process.

“I always tell my clients who want to renovate that this will be the most lucrative or most expensive part-time job they will ever take,” Chaddah said. “If you’re not involved in the process, mistakes and duplications will happen and that’s where costs get out of hand.”

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This post Remodeling will probably cost you less than buying a new home, but the costs can quickly spiral out of control

was original published at “https://financialpost.com/personal-finance/family-finance/renovating-will-probably-cost-you-less-than-buying-a-new-house-but-expenses-can-quickly-get-out-of-hand”