How to get value out of your house without selling

Garry Marr
The Financial Post


Here’s a way to get some value from your house without selling. Just be prepared to stay put and be ready for some headaches.

Renovating can make your home bigger and more valuable but without any of the enormous transaction costs that can easily top 10%, depending on where you live in the country.

The federal government might have made it more difficult with its tighter and tighter regulations over the last three years to extract cash out of your home to pay for renovations.

Whereas once you could refinance your home for up to 90% of the value, it’s now only 80%.

If you bought a $500,000 home with 5% down, it has to rise in value past $600,000 before you would be able to extract some equity for a renovation. With home price increases shrinking — they are not falling in most parts of the country despite the general negativity — that hasn’t left much opportunity for a major project.

But guess what? Canadians have other ideas. A new poll shows they are actually saving for major projects based on the results that reveal a majority of Canadians are paying for a renovation with cash.

A Bank of Nova Scotia study found 44% of Canadian homeowners plan to do a major renovation in the next two years. Among that group, 62% will fund the transaction with cash.

“The renovation market is quite large in Canada and quite consistent, people are reinvesting in their homes,” says David Stafford, director of real estate secured lending with Scotiabank.

People are reinvesting in their homes

The amount of money spent on renovations in Canada is still dwarfed by the money people spend on buying homes but it’s not small potatoes either. The latest annual data from Canada Mortgage and Housing Corp. put the market at $20.9-billion in 2011 across 10 major markets.

Full disclosure here. My money is with those people. I’m planning my own renovation — having come to the conclusion that the transaction costs associated with any move into an upgraded house almost gives me “free” money to play with in my current home.

Okay, it’s not free. I have to fork over the cash. Refinance. Get a line a credit. Take it out of my TFSA. Whatever. But the bottom line is moving would have cost me enormous fees.

Unfortunately for me and the other 2.6 million people in Toronto, we live in a jurisdiction with two land transfer taxes. You have to pay both the city and province which amounts to $16,200 on a $600,000 purchase or about 2.7% of the value. The only other city with an equivalent tariff is Montreal with its so-called welcome tax.

Consider some of the other costs associated with moving. Realtors can begin emailing me now but the realty is you are looking at 4% to 5% commission on the sale of your home. Add in legal fees, moving costs and some of the soft costs like painting and minor repairs that come with any selling and buying transaction and it’s not hard to get to 10%.

“I wouldn’t say renovation is just a financial decision,” says Mr. Stafford. “People are looking to improve the quality of their environment. The financing and financial requirement are just part of that decision.”

It’s a good point. We’ve come to think of our houses as an investment because they can easily top 50% of our net worth but they are as much about consumption as anything.

Let’s say you do that $50,000 kitchen project. Is your house really going to be worth that much when it comes time to sell? Probably not but in the interim you get to enjoy all those years of cooking and eating in your fabulous kitchen.

“The reality is that very few renovations return a dollar for dollar,” said Mr. Stafford, adding one of the other reasons people choose to improve their existing home are qualitative. “They like the neighbourhood they are in.”

There’s no question not all renovations go as planned. One of the great perils of renovation is doing the whole thing in cash, to avoid HST, and without permits to avoid costly fees.

“It’s cheaper in the short run but maybe not the long run,” says Raymond Leclair vice-president of public affairs with the Lawyers’ Professional Indemnity Company.

The tax is ultimately something that your contractor is required to pay and there’s nothing technically illegal with a verbal contract. But when things go wrong, what do you do without a paper trail?

“It becomes a ‘he said, she said’ situation and you get into court before a judge and say ‘he painted it blue and it’s supposed to be green’. The other said says the opposite,” says Mr. Leclair.

And when it comes to permits, think twice about not doing it by the book. When you sell, the buyer may ask if that addition you built is up to code. The city can ultimately order any project done without proper permits to be taken down, says Mr. Leclair.

Doing a renovation on the books is going to cost you more money. For sure. But when you start by saving up to 10%, it’s worth it.