I personally would go with "in place" (my words) vs "potential". Dreams are nice, but from the sound of it by the time you got to where you think you want to go today, you would have had 10 newer dreams, be broke and so sick of 'house' anything you couldn't remember why you ever bothered. Cynical maybe, but the first place sounds more worthwhile and not necessarily knowing what tomorrow holds (these days) I wouldn't bet everything on tomorrow.

I think it all depends on how deep your pockets are and how important having exactly what you want is to you.

The bottom line is you can buy so much cheaper than building right now.

Also, where are you at in life right now? What constitutes a "dream house" can change a lot from age 35 to 55. An ideal house to raise kids in could be an upkeep nightmare for someone heading into retirement.

Between the two, I'd go for "a", too. It will probably keep its value with just routine maintenance. You'll probably like it a lot more once your own stuff is in it. If, for some unforeseen reason, you need to relocate, this house will be ready to sell. If you needed to sell the fixer-upper before or during major renovations were completed, you could lose money. The dream could turn into a nightmare, too, once you start tearing it apart.

Or keep looking for a house in a good neighborhood that doesn't need as much work.

Excellent advice, from the previous posters.
I, for one, do not accept a house as being an investment....the land, perhaps.
We should be investing in permanent things...
We may have "over-invested" recently, causing grief, short sales, bankruptcies,bail-outs.

We don't know where you are in life. You refer to raising kids; how old are they now, or do you mean you plan to have kids? There have been several plans posted recently on the "Building" forum by mid-to-late-30's couples. They've designed HUGE homes for families that don't yet exist. The homes are absolutely beautiful -- for DINK's! LOL

Your second scenario doesn't appeal to me at all. But then, I am the Teardown Queen. Unless a house is historic or a municipality requires you to 'preserve' it, re-doing more than half a house is not financially rewarding. You can spend a lot of time and money to end up with a mongrel. You will NOT recoup the expense and you will have given up years of your life to the 'project'.

Your first scenario sounds good, except you seem to be minimizing the work needed -- "JUST remodeling the interior"?! Would you live in it while doing this? (More years and family time that is -- whoosh! -- gone. You 'camp out' and endure while remodeling goes on and on.)

Do you need to move now?

I would be in the (a) camp. You can not say enough for the great location....location, location, location. Believe me, it is no picnic to remodel a house, especially if you have to live there while doing it.

We need to know your age bracket and that would help...children and ages.

Just 10 short years my DH and I built our "forever house"...but times change, health fails, and the economy tanked and now in our "not so golden years", we are in the process of selling this way too large house with all the extras, to down-size drastically to a handicapped accessible one that is more affordable and with easier up-keep.

If these two houses are nearly the same price...and it is a nice home, why risk all of your money in a house....after all, it is "just a house".....unless you are flushed with cash~~...just my 2 cents.

Thanks everyone! This is so helpful, and I'm a little surprised by the overwhelming response to option A.

We are in our early 30's and have an infant and toddler. Absolutely not deep pockets - we have a set amount of money put aside for remodel. Timing wise we are open b/c we will continue to live in our current house while the remodel is happening, we are ok with paying the 2 mortgages for a while.

I agree with 'earthworm', you just cannot "bank" on houses anymore. The costs, unless you can do some of the work yourself, is so expensive. You will be surprised as to how much it will cost you to "just remodel the interior"!
Good Luck!

"we have a set amount of money put aside for remodel". Really? Have you ever lived through a remodel even of just a bathroom? You may think $50,000. (example) is enough money to work with for Option 2, but believe me, it won't be even close. I've never, ever, heard of a redo that came in at anything less than at least 1/4 (usually more) more of the allocated money, and sometimes compromises end up being made that take away the aspects of what made the dream a dream in the first place.

OK, now we know you are a young family; have reserves set aside for your next house; can afford to remodel while staying in your present home. You will want to take a realistic measure of how much any remodeling will cost and how long you'll carry two houses. Then add 20%. You'll probably also face costs to bring any older home up to current earthquake code.

Another OT questiion: Would you be comfortable living in these neighborhoods? I'm thinking that you don't want your kids to be branded 'the poor kids in that little house' in a ritzy area. (It happens.) There can be a *social* downside for your kids to following the good *financial* advice to buy the smallest house in the best neighborhood.

Another factor right now is the economy. Existing housing has a ways to go before reaching bottom. New construction is much more expensive than buying existing. 'Tis a really difficult time to move, especially if you are a seller. (Do you have a lot of equity in your present home?)

Definitely, DEFINITELY option A. In the SF Bay Area (where I am too) location is a huge factor and if you do hope gain some equity in a house the best bed is the worst house in the best neighborhood. Remodeling your dream home is a wonderful plan, but with two little babies to enjoy it will be too much time and headache away from your life and time with them.

Option A for many reasons.

1) less remodeling which means less time invested - and time is priceless.

2) best location and this is more important than anything else for real estate.

3) always want to be the smallest (or not the largest) home in a subdivision. Option A provides you this.

4) because interior remodeling, ROA will be great for option A and less costly/time consuming for you then Option B. Also easier to live in Option A while remodeling.

5) option A is much better investment if/when you ever sell.

6) after the kids are raised, you can revisit selling option A and getting your dream house and will get a nice ROA due to location. At that point in time, your new dream house can have new/modern features that we don't even know about today. Even if you chose Option B today, in 20 years, much of it will be outdated. Besides, in 20 years, you might pick a totally different area that maybe the kids relocated to and you want to be near them in the future.

7) option B is so hard/trying that your life would be very stressed for several years. this could cause marital issues and even if it doesn't it takes time away from being with the family just living life. Again - time is priceless.

Option A. We recently sold our house & because it was the smallest house in a great, expensive location, it sold in 2 days to the 2nd person that saw it. Based on sq footage alone, we were a good $50-100K less than the 2 other houses on our street for sale. The family that bought it, wanted in that neighborhood but could not go with one of the larger homes. There is plenty of room for an addition should they ever choose to do it, but for now, with one child, they are good. We went on the market June 30 - had a contract on July 2. The other 2 houses are still on the market.

IMO, always, always, always choose the best and nicest location you can afford. For me, the house comes second.

Yes i agree location is important but home is too important. We are Stephen Alexander Homes & Neighborhoods, award winning home builders Chesapeake VA, who develops new homes, custom homes, new construction, New Single Family Homes, classical home design in Chesapeake VA.

Here is a link that might be useful: new homes chesapeake va

What does your spouse think? If he/she is even the tiniest bit anxious about tackling the dream house, go with option A.

I'm another leaning toward option A. But that depends alot on what you mean by a good neighborhood and how different the 2 neighborhoods are.

Can the kids walk to school? What else can you walk to (parks, public trans, business district, library, etc.)? I would hate to be tied to my car for everything, and especially felt that way when my kids were younger. What are the schools like in each area? (Great walk-to schools and walking distance to the train have helped keep home prices more stable where I am than in other areas nearby.)

Do you have a sense for what the other people in the neighborhood are like, such as are there lots of kids or young couples like you? I think I'd spend some time walking around each neighborhood and picture myself walking with a stroller, walking to school, visiting the neighbors and parks, etc. Then I'd do some of my errands... go to the grocery store and the hardware store, do the commute to work, go the health club. Hang out at the local coffee shop in each area. Does one spot over the other feel more like home?

what did you decide?

neither, still looking.