To start off with, you can get some idea of renovation costs by searching online, but the information will probably not be very reliable. Costs vary a lot from one place to another, and building costs in your city might be a lot different than somewhere else. The best way to get an idea of renovation costs is to talk to some local builders or architects and ask them what a building costs in your city are. They will probably tell you a price range per square foot. Here in Ottawa, a ballpark building cost is around $250 per square foot. A big suburban developer building town homes might be able to build for much less, like $150/sf, because they're building a whole bunch of similar houses at the same time. And a high end custom builder could be much higher, like $350/sf. A lot depends upon what you want to build. If it contains a lot of steel work, high end custom millwork and finishes, high-end windows, and cutting edge features you can easily blow past that ballpark figure.
I haven't calculated the final square foot cost of our renovation. I'm actually a bit scared and would almost rather not know. But $250/sf is definitely not an overstatement. I think it's quite a bit more than that, and really more than it should have been since we had a lot of problems with the first contractor and had to replace him with a different one.
You might think that if $250/sf is the cost to build something new, it should be a lot cheaper to renovate an existing building. That's not really true. If all you're doing is repainting the walls and replacing some fixtures then sure, it'll be much less. But if it's a serious renovation where you're planning to go in and bring everything up to modern day standards and a like-new condition, renovation can actually end up costing more. Depending on how extensive the renovation is, you might want to seriously consider a complete demolition and new build. Once you start taking walls down you can find a lot of surprises. One of our surprises was that the entire house was built out of cinderblocks, including all the exterior walls. The architect, engineer, and contractor all failed to identify this when they were inspecting and coming up with the initial plans and estimates. Then my neighbor told me "you know all these houses are cinderblock walls, right?" This caused a change of plans that ended up costing several thousand dollars, extra time, and certain weird details on the resulting floorplan.
Once you have an idea of building costs in your city, the question is how to pay for a big renovation. In my case, I bought our house more than ten years ago in a little neighbourhood that somewhat of a hidden gem near downtown, but tucked away in a quiet corner near lots of green space. There were a lot of smaller, older houses in area so despite being a great location, it wasn't considered a ritzy neighbourhood. After a while though, a developer came along and bought up a few ramshackle houses on the street, renovated them and sold them for a lot of money (or tried to). Many of the other houses had been renovated already in the 80's and 90's, but one by one the remaining older houses started to get renovated too, and some very nice modern homes started to pop up. Someone said to me that our quiet little neighbourhood "had been discovered". So property values started to go up by a lot. I was surprised to find out that my property was worth much more than I had bought it for.
I got a professional appraiser to come and do a valuation on the house. The was worth almost double what I had paid for it. I knew that if I sold the house, the next owner would renovate it. Instead of letting someone else renovate it, I wanted to take the increased value of my property, and use that money to renovate it. If you buy a house for 100k, and 10 years later it is worth 200k, you can talk to a bank and say look, I owe about 50k on my mortgage, but my house is now worth 200k, so I would like to refinance and borrow against the new value. So you get a new mortgage for, say, 200k, pay off 50k you still owe, and then you have 150k left over to renovate with. That is roughly how it works anyway.
Once the basic plan was in place and we had started working with an architect to come up with a plan, and started talking to finance people about paying for everything, the house next door to me started to get renovated. And it was a huge renovation with a very high price. I knew how much the developer had paid to buy the old place that was there. It was as much as my house was worth. And then he tore it down. So I went back to the appraiser and said look, someone just bought the place next door for this much money, just to tear it down. And now they're building a big mansion on it. So that means property values around here are worth more, just for the land without a house on it even. And I paid him again to re-appraise it. Based on what was happening next door -- the sale of the old place for land value and the mansion they were putting up -- my land, without the house even, turned out to be worth even more than what they had appraised to whole package at previously. This was good, because by that time we had already started some demolition work on our house and we knew the renovation costs were going to be higher than we originally thought.
Now for the final bit of important info. You do not want to go to a mortgage broker to talk about renovation financing. Mortgage brokers are well and good if you're just looking for a typical, run-of-the-mill mortgage at a good rate. But mortgage brokers generally are not in the construction financing business. The mortgage broker I spoke to, who had been very helpful before, nearly ruined us. He tried to steer us into a loan from a third party lender that had very, very high interest rates. Now, he said we didn't need to worry about it at all, because the bulk of the borrowing would happen right at the very end, so we'd only be paying high interest for a very short period. He sounded very positive about the whole thing, probably because he was going to get a big fat commission from it. But it would have ruined us when we hit problems with our contractor with long delays and cost over-runs. Fortunately, the way events transpired, there were hold ups and delays in getting the paperwork sorted out, and while we were waiting for it all to come together, we were introduced to a Construction Financing specialist from one of the major Canadian banks. I didn't know this, but it turns out that banks like CIBC do have construction mortgage specialists on staff, and if you can get in contact with them, they are the people to talk to. The bank's interest rates on construction loans are higher than a regular mortgage, but still much, much lower than the 3rd party lender that the mortgage broker was trying to hook us up with. The banks are "prime lenders" and for a construction mortgage you'll be much better off with one of them. I would avoid using any financing outside of one of the main banks, at all costs. Even if it meant not doing the renovation. Now, I know people who have done it both ways and come out ok, but the construction financing specialist at CIBC told me quite frankly, "We see people all the time that have gotten stuck with one of these 3rd party lenders and they come to us in a total panic trying to get out of it. It's really unfortunate."
Typically what will happen is the bank will agree to give you a deposit to start the renovation project that is worth a certain percentage of your land value. That should be enough to get going. The total amount of the construction mortgage will be based on what they think the final value of your house will be once the renovation is all complete. This will probably be a conservative estimate, but they want to make sure that once your house is done, it'll be worth what it cost to renovate. The bank, and the independent appraiser that they use, will have a certain amount of money allocated for each major component of the build. You can ask them for the breakdown. You are expected to use the initial deposit money to get the first phase of the project done which is typically to have the structural and framing work done. At that point you can apply for a draw against the construction loan. The inspector will come out and see how much you've gotten done. Based on the amount of work completed the bank will release funds to you, and then you can carry on with the next phase. If you have a good builder, they will complete work quickly and have a month before their own bills are due on the work. They should also have accounts with building suppliers that allow them to carry a balance for 30 days. A good builder can get a lot done in 30 days, invoice you, and leave enough time for the city inspector and bank inspector, and possibly the architect and engineer, to inspect things, approve the draw on your construction loan, and get the funds sent to your contractor.
You'll generally need to work with a lawyer who specializes in construction financing too. The bank will probably recommend one. Your lawyer will approve the draws and release the funds. You can have your lawyer release the funds to you directly, and then you pay the contractor, or you can have your lawyer send funds to the contractor's lawyer. I would suggest the latter... have your lawyer issue funds to the contractor's lawyer. This means less running around for you personally and a better paper trail. A lawyer also has a bit more clout and will do things "by the book". If you establish this early on, you can avoid bad situations like the one I found myself in, where the contractor started pressuring me to give him money directly, outside of the normal schedule of bank draws.
Next time I'll post a rough breakdown of costs that was used by the appraiser showing what percentage of the finances are allocated to each portion of the build. This can be useful in estimating how much various sub-contracted jobs like foundations, drywall, painting etc. cost in proportion to the rest of the build.
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