So a dormer loft conversion costs the same as a side extension? It sounds like you'll be getting more space for the side extension for the same amount of money then. Have you had a look at other bungalows down your road or area that have had extensions vs no extensions and see what they have sold for, then you can see if it's worth it but who knows what the market will be like in a couple of years time. In terms of appealing to more when selling, people probably would prefer bedrooms upstairs but if bedrooms are larger and downstairs is huge it will be more attractive to buyers ( I think ) especially if there is a large family. Lots of new builds have a bedroom downstairs so it's not unusual plus families considering a bungalow won't be looking for the norm in terms of layout so 2 bedrooms downstairs is fine. You can also ask your estate agent that sold you the bungalow, get their thoughts on what is attractive to buyers, I'm sure they'll be helpful in case you'll use them in the future :-).

I also don’t think you can live there while it’s being done. I think you should look into raising the roof then connecting the main house roof to the roof of the kitchen wing. I also don’t think you need to remove what looks like a top end conservatory. But you do need to find a good architect to help discuss what is possible and you need to think about your budget as it’s a big undertaking. For what it’s worth this is what I would do.

In my opinion you can’t create more rooms than you have windows. So you should give the larger master bedroom to the children and divide it with furniture or screens that can easily be removed by the next people. You would then take the bedroom with the balcony or you would use this space as a living room, make an aperture to the kitchen then add a partition wall to the living end of the kitchen to annex a new bedroom. Be aware that any bedroom off a kitchen may require fire regulation approval.

Bedroom sketchers