Misguided house makeover

house makeover
House Makeover (Infographic by Allianz Australia Home Insurance allianz.com.au)

Do you really need to spend money to make money?  Deciding what renovations and updates to make prior to your home sale can be tormenting.  It’s easy enough to say that your home needs a facelift; but, the repairs, updates, and painting costs money – and usually lots of it.  The suggestion of making renovations and updates to your home before you sell is everywhere, it’s on TV, the internet, and magazines.  And if you ask friends and real estate agents, they will also give you a list of “must do’s.”  Regardless of how you decide to do a house makeover before the sale, chances are that you’re not doing it right.

There is no doubt that many home buyers are looking for a turn-key home.  If your home is not “out of the box brand new,” you probably need to freshen it up, as well as make some repairs and updates.  But before you embark on the house makeover by making those renovations, you need to ask yourself two important questions: “How much money can I realistically allot for a makeover?” and “How much am I expecting to net from my home sale?

Does a house makeover really get you top dollar? Spending money on renovations will certainly make the home sell faster, but not necessarily make you more money.  And there is no guarantee that the house makeover renovations you make are to home buyers’ tastes.  So if you’re goal is to get top dollar, don’t look at the sale price.  Instead keep your eye on your estimated net (the amount you’re left with after the sale minus total renovation costs).

Of course, the best way to maintain your home’s value is to perform regular maintenance.  It would certainly make the home prep easier too!  But the reality is that many home owners defer maintenance until they feel it’s absolutely necessary.  Deferring maintenance can actually cost more in repairs down the line, and lower your home sale price.  Spending money to correct all the years of neglected repairs and updates prior to the home sale won’t necessarily get you top dollar.

Not all buyers are looking for renovated homes.  One of Stephen B. Billings conclusions in his recent research (Hedonic Amenity Valuation and Housing Renovations; Real Estate Economics; Fall 2015, 43:652-82) was that during the past “healthy” housing market, there was a balance between renovated and non-renovated homes that sold.  However, he also found there was an increase in renovated home sales during the housing downturn of 2007.

Selling your home “as-is” would certainly decrease your sale price, but could net you the same or even more if weighed against extensive renovations of the house makeover.  Consider that you would only recoup a fraction of the cost of a minor kitchen and bathroom remodel; which averages about $20,122 and $17,908 respectively (according to 2016 Cost vs Value Report; remodeling.hw.net).

Concentrate on the basics of decluttering first. Decluttering can make your home look different and feel larger.  Decluttering can set the stage for fo you decide on renovations, and maybe even home staging.

If you decide on freshening up your home before the sale, start with the basics.  Focus on deferred maintenance, and make necessary repairs.  Consider a fresh coat of paint, and maybe new carpets.  Wood floors don’t necessarily have to be replaced or sanded; flooring professionals use state of the art processes to “renew” wood floors.

If you decide on a house makeover, focus first on making repairs and freshening your home. Work out a budget and get several quotes from licensed contractors.  Don’t automatically go for the cheapest quote, even if you’re on a tight budget.  Focus on quality, even if it means limiting the scope of work.  Poor workmanship can sabotage your home sale by making your home look shabby and in need of additional repairs and updates.

Copyright © Dan Krell
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Property Brothers option to home buying

The Property Brothers option
The Property Brothers option when buying a home – home improvement infograhic (from census.gov)

If you’re looking for the perfect turn-key home, you may find that the already limited home inventory is further limited by the many homes with deferred maintenance and those that are in need of updates.  If you’re like the many frustrated home buyers in today’s market, you may decide to take the route of buying a home that includes the Property Brothers option.

As you know, HGTV’s Property Brothers is one of the most popular real estate shows on cable.  What makes the show work is the concept of transformation; creating a model home from one that is crying out for TLC.  Of course, the magic of TV makes it seem easy; home buyers appearing on the show put their trust into the dynamic duo to find the right home and to make it perfect.

A warning, however, this process is not for everyone.  Undergoing this type of project (buying and rehabbing a home) is taking an already exasperating process and making it an emotional and financial challenge.  It is also a time consuming, as you’re totally involved – from buying to rehabbing the home.  Your experience may be similar to those on TV, nevertheless it is more likely to feel like the movie “The Money Pit” or somewhere in between.

Unlike the Property Brothers, you don’t need your real estate agent and your contractor to know each other.  Each has a distinct role; one is helping you acquire the home, and the other is remaking it.  However, it’s a good idea to make sure each is licensed and experienced in this type of process.  Ask for references; some contractors will even have a portfolio of their work.

Before you begin taking the Property Brothers option, make sure you have the funding and your real estate agent and contractors are ready for action.

Talk to a lender about a renovation loan.  Besides providing the money to buy the home, a renovation loan will provide funding for renovations.  Loan programs and mortgage limits vary, so it’s a good idea to get qualified before you write a contract to buy a home.  Make sure your contractor can provide details about the renovation, as the underwriter will review the plans.  Consider a FHA 203K program, which also offers a “streamline” version for less expensive renovations.

Working with a top notch real estate agent is key in not only finding a home, but also negotiating a price.  The ability to think outside the box is very helpful in this phase.  They should be able to find the “diamond in the rough,” that provides suitable space at the right price.  If you’re communicating well with your agent, they will understand your requirements.

Once you identify a home (and before you write the offer), meeting with the contractor will determine if your vision is possible, and its price.  Be realistic and flexible.  Be prepared for bad news and to move on to another home.  Sometimes the home needs too much work and/or the cost of the renovation could be beyond your budget.

Even if you have lots of cash to spare, it’s recommended that you start by creating a budget.  Besides the acquisition cost, consider the renovation costs and carrying costs (if the project is long term).  Also decide on your limitations.  You may decide on limiting renovations to kitchen and bathrooms; or you could broaden the project to be more ambitious.  Consider creating a short term and long term plan for the house; focusing on critical repairs immediately, and making other updates over time.

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The roof overhead

How to know your roof needs to be replaced (http://phoenixroofingteam.com)

People often ask why I frequently talk about home maintenance, and specifically the importance of maintaining the roof. The reason is simple; many issues can develop with an improperly maintained or neglected roof. Besides allowing water to penetrate directly into the inside of your home from a leaky roof, water can also penetrate a basement when the roof and gutters are not properly directing water away from the foundation.

Besides leaving unsightly stains, water entering the home from a leaking roof can seep through walls and ceilings deteriorating drywall and even possibly weakening floor trusses/beams. Water from improperly moved water can create standing water around the home, and enter into the basement. Additionally, any water penetration into the home has the potential to promote mold growth; which not only can affect your health but your home’s structure as well.

It’s obvious that a leaking roof is a problem; and now you know how an unchecked leak can damage your home over time. The good news is that proper maintenance can prevent major leaks and resulting damage. Visually checking the roof (from the ground) regularly can make you aware of general condition of the shingles, flashing, gutters and downspouts. Curling, lifting, broken or missing shingles as well as missing or broken flashing are potential water entryways into your home; and it may be an indication that you should call a licensed roofer to further inspect and repair the roof.

Debris on the roof can not only damage the roofing material, it can also clog or damage the gutters and downspouts. The purpose for gutters and downspouts is to carry water away from the home so as to prevent soil erosion around the home’s basement and foundation; which is a common cause of outside water penetration into the basement. Clogged or damaged gutters and downspouts should also be repaired in a timely manner. Experts recommend to clean and inspect the gutters and downspouts twice a year to ensure proper function.

The two most common roof types are the flat roof and the pitched roof. Flat roofs are typically covered by a membrane, and are thought to be more vulnerable to weather than pitched roofs because of the limitation of gravity’s water draining action. Pitched roofs can be covered in a number of materials. Although shingled roofs are very common, metal roofs are becoming more popular because of its durability. Shingles can be made of many different materials for aesthetic and architectural needs (including solar panel shingles); but in our region the asphalt shingle is most common, and generally has a life expectancy of twenty to fifty years (depending on the quality).

If it’s time to replace the roof, have several roofing contractors provide you with estimates detailing the materials used and estimated labor. A cheaper estimate may not only be the difference in the quality of shingles; but also may not remove the old shingles, leaving them intact under the new roof. Make sure your estimate includes contractor clean up, so you’re not left with piles of old roofing material in your yard.

Always hire a Maryland Home Improvement Commission (MHIC) licensed contractor. The MHIC maintains a Guaranty Fund that compensates homeowners for actual monetary losses due to poor workmanship or failure to perform a home improvement contract; however, The Fund only applies to work done by licensed contractors. The contractor’s license can be checked on the MHIC website (dllr.state.md.us/license/mhic).

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The cost of doing nothing – deferred maintenance and home values

HousesIf you want to have one of the faster home sales in the area, you’re probably going to have to wait until you die. According to a 2012 study, “estate sales” sell faster than other homes. Benefield, Rutherford, & Allen’s study compared time on market and price of estate sales to regular sales, and quantified what many ostensibly know: estate sales sell about 3.4% faster and about 3.6% less than other homes (Justin, D. Benefield, C. Rutherford Ronald, and T. Allen Marcus. “The Effects of Estate Sales of Residential Real Estate on Price and Marketing Time.” Journal of Real Estate Finance and Economics 45.4 (2012): 965-81).

Although the study is one of many recent studies raising awareness about real estate outcomes in our aging population, one of the main considerations for the rapid time frame and discounted sale price is deferred maintenance; and the issue of postponing home repairs and updates is prevalent among all age groups.

Before Kermit Baker wrote “The Return of Substandard Housing” for the Harvard Joint Center of Housing Studies, it was not quite known how much less home owners spent on home maintenance during and immediately after the Great Recession. However, the 2012 study indicated that “improvement spending” decreased 28% between 2007 and 2011, which essentially “erased” such spending during the housing boom (housingperspectives.blogspot.com).

And as the economy slowly improves and home prices increase, you might expect that home owners will reduce deferred maintenance and once again spend on home improvements. According to Craig Webb (Remodeling Activity Rose Again in 1Q, RRI Shows Nation remains on track to hit record remodeling pace this fall; May 18, 2015; remodeling.hw.net), the Residential Remodeling Index (RRI) increased 1.4% in the first quarter of 2015 compared to the previous quarter, indicating that improvement spending is indeed on the rise (albeit below the 2007 peak).

But what’s the cost of doing nothing? Deferred home maintenance is cumulative, and its effects can be wide ranging. For many, having put off home maintenance and repairs has impacted home sales in recent years, and may continue to be a factor in years to come. Although average home prices have increased, many home owners have found that a lack of home maintenance, repairs and updates over the years is an impediment to selling their homes at higher prices – or even at all.

A mindset exists among many home owners, and even real estate agents, that years of deferred maintenance can be overcome with some updating and minor repairs just before a home sale. And although improvements will certainly make your home more appealing to home buyers, it won’t necessarily increase your home’s value as much as you think (or as much as you’ve been told).

Before undergoing any project, crunch the numbers and determine the value of your repairs/updates, and how that might realistically affect your estimated sale price. Remodeling Magazine’s annual Cost vs. Value Report (costvsvalue.com) can give you an idea of the return-on-investment (ROI) for improvement projects. Getting back to your expectation of adding value – most improvement projects will only return a fraction of the cost in today’s market.

If you are making improvements, you should consider hiring reputable, licensed contractors who are familiar with the permitting process and building code requirements; because ROI is not always determined by the amount spent on the project, but on the quality of workmanship as well.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Don’t skip the home inspection – old, new, or renovated

homesLike the 49ers seeking gold in California, real estate investors have flocked to D.C. in recent years to seek their fortunes. As home values rebounded, many distressed homes were snapped up by investors with the intention of renovating/rehabbing, and then selling them. For many home buyers, these “flipped” houses have become home; however, for a few, the dream has become a nightmare.

Martin Austermuhle reported on WAMU (A Dream Home Becomes a Nightmare; wamu.org) about D.C.’S house flipping environment and highlighted one family’s dream turned nightmare. Characterized as a “cautionary tale of home-buying in a hot real estate market,” the story was basically about how rotted wood in the porch has led to a multimillion dollar law suit between the purchasers and the rehabber.

If you haven’t received the memo, “house flipping” is once again a bad thing – or is it? Unfortunately, “flipping” has become synonymous with fraud and scams because of the attention that it received in the mid 1990’s (as the result of widespread fraud and scams that involved flipped homes). At that time, several cities (Baltimore being one) were known for flipping scams because of the investors’ ability to purchase a home for very little money and turn it around for a big profit.

Although, there should be nothing wrong with buying a distressed property, rehabbing and selling it (aka home flipping); flipping has generally become the term used when there is an accusation of fraud or con involved with a rehabbed home. During the 1990’s, flipped homes were the center of many mortgage fraud cases that took advantage of lenders by providing false income statements, fraudulent credit reports, and/or fraudulent appraisals. In these cases, the investor was not the only scammer; as accomplices often included: loan officers, appraisers, title agents, real estate agents, and even “straw” buyers.

Many home buyers were also scammed into buying homes in disrepair that were represented as being rehabbed. And believe it or not, some of these homes were nothing but shells (e.g., gutted).

In the aftermath of the flipping crisis of the 1990’s: lenders wrote off hundreds of millions of dollars, lawsuits were filed, and a movement grew to educate home buyers about the need to conduct home inspections. Mortgage underwriting changed to safeguard against future scams with the introduction of title seasoning (length of ownership).

Legitimate rehabbing of distressed properties has always been a viable industry; and can transform an eyesore into a livable home. However, just because renovations have been made to an old home doesn’t mean that it is now brand new!

When buying a home, you must do your due diligence regardless of the age of the home. A thorough home inspection should be conducted, even on new homes. Although home inspectors don’t have x-ray vision, the technology they employ can sometimes make it seem as if they do. Besides the routine identification of deferred maintenance, home inspectors can typically identify issues with renovations and can usually identify code violations. Furthermore, you should check permits when considering a home that has been renovated or expanded. Many jurisdictions offer online services to search permits; locally, the Montgomery County Department of Permitting Services has such a search portal (permittingservices.montgomerycountymd.gov).

If you’re buying a home, you might also consider working with an experienced Realtor®. A seasoned professional is not only knowledgeable about neighborhood price trends and disclosures; many are skilled to work in tandem with the home inspector to negotiate repairs.

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.