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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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.

How long before your home is obsolete?

home mainetance

How long can your home remain livable? According to a study by the National Association of Home Builders / Bank of America Home Equity titled Study of Life Expectancy of Home Components (February 2007), “The life expectancies of the components of a home depend on the quality of installation, the level of maintenance, weather and climate conditions, and the intensity of use. Some components may remain functional but become obsolete due to changing styles and preferences or improvements in newer products while others may have a short life expectancy due to intensive use…The average life expectancy for some components has increased during the past 35 years because of new products and the introduction of new technologies, while the average life of others has declined…” (nahb.org).

Throughout a home’s lifespan, a home may be considered obsolete in a number of ways. A home is often considered functionally obsolete when it is deficient of items that are considered to be required in the present marketplace, and/or no longer conforms to modern building standards. Because building standards change over time, it is not uncommon for older homes to be considered functionally obsolete because it lacks up-to-date and/or enough amenities. Even modern homes can become functionally obsolete if maintenance issues deteriorated the home’s systems (such as during a fire, or severe hoarding cases).

The decrease in maintenance spending during the Great Recession has many wondering about today’s housing stock’s functional obsolescence. A February 2013 article by Kermit Baker for the Harvard Joint Center of Housing Studies entitled “The Return of Substandard Housing” highlighted the relative considerable reduction in maintenance spending by home owners (housingperspectives.blogspot.com). He stated that “improvement spending” decreased 28% between 2007 and 2011, and concluded that this “crisis” requires attention. He stated; “The longer-term fate of the current slightly larger number of inadequate homes [functionally obsolete] is unknown. Many of these homes likely will be renovated to provide affordable housing opportunities. However, many may not recover without extra help. Given the extraordinary circumstances that many homes have gone through in recent years, particularly foreclosed homes that often were vacant and undermaintained for extended periods of time as they worked their way through the foreclosure process, they may be more at risk than their inadequate predecessors…

Economic or external obsolescence is often considered when influences, other than the structure, impact a home’s value. For example, the value of a well maintained home can be impacted when many community homes are vacant: due to foreclosure; or when there is a major relocation, such as when a small town’s manufacturing plant closes. Environmental issues can also be considered a factor in external obsolescence; you can bet that the homes around the Chernobyl nuclear plant were affected immediately following the 1986 disaster.

Although the remediation of external obsolescence is often complicated, the good news is that many functionally obsolete homes can be repaired extending their life; renovations are common, upgrading the homes to meet modern building codes and with modern amenities.   However, a restoration is sometimes completed to return a home to its original condition – but with modern conveniences; these homes typically have historic significance.

And of course, functionally obsolete homes are sometimes sold as a “tear down”; with the intention to replace the structure with a modern home that not only meets current building standards, but meets consumer trends in home design, size, and function.

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By Dan Krell
Copyright © 2014

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.

Renovate your home with FHA 203k

FHA 203k
Renovate your home with a FHA 203k

If you’re like many home buyers, you’re probably looking for a home that is “turnkey” or an updated home that is ready to move right in.  However, since inventory is tight, competition can get intense.  But rather than passing on the “diamond in the rough,” consider the FHA 203k.

The FHA 203k is HUD’s rehabilitation loan.  The “203k” actually refers to the section within the National Housing Act that provides HUD with the ability “…to promote and facilitate the restoration and preservation of the Nation’s existing housing stock;” in other words provide mortgages to renovate and rehabilitate existing homes.  Although the program is not allowed to provide for “luxury” upgrades (such as hot tubs), the program may be used “…to finance such items as painting, room additions, decks and other items…”

If you’re purchasing a home that is not a total rehab project, there is a streamlined version of the program that can assist you to purchase the home and provide additional funds (up to $35,000) for improvements and upgrades.  The FHA 203k-streamline is a “limited loan program” designed to provide quicker access to funds so your home move-in ready relatively quickly.

The “203k” process is relatively straight forward.  After identifying a home, you should consult your 203k lender and consultant about the feasibility of a FHA 203k.  A project proposal is prepared detailing a cost estimate for each repair/improvement.  During loan underwriting, the appraisal is completed to determine the value of the home after the proposed repairs/improvements are completed.  If the mortgage is approved, the home is purchased with the loan and the remaining funds are placed in escrow to pay for the project.

Much like a typical mortgage, you must qualify for the program by meeting underwriting standards for borrowers.  However, unlike the typical mortgage, additional underwriting requirements include review of architectural plans and repair estimates (materials and labor) from licensed contractors.  HUD approved consultants/inspectors examine and evaluate the project’s progress to ensure work is completed and compliant with HUD standards.  Funds for the repairs/renovations are released in draws to ensure the work is completed as intended as well as meeting all zoning, health and building codes.

Of course, the home must also meet eligibility guidelines.  The home: must be one to four units; must be at least one year old; and must meet neighborhood zoning requirements. The program allows for major rehabilitation on homes that have been razed provided that the foundation still exists.

But what if you’ve decided to renovate your home rather than move?  The FHA 203k allows for home owners to make renovations, updates, and sometimes additions.  The possibilities seem endless (as long as your vision stays within the loan limits).   Besides painting and updating kitchen and bathrooms, you could possibly even expand your existing house with an addition.  The FHA 203k even allows for many “green” upgrades to make your home more efficient.

FHA guidelines have been revised in recent years, and may undergo further revisions.  It is important for home buyers and others who are interested in the FHA 203k to consult with an approved FHA lender for borrower and home qualifying guidelines, loan limits and 203k acceptable improvements.  Additional information (including a list of lenders) can be found on the HUD website (HUD.gov).

Original published at https://dankrell.com/blog/2008/09/19/fha-203k-renovation-loans-are-still-available/

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By Dan Krell

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © Dan Krell.

What’s the return on your investment?

by Dan Krell
© 2012

If you’ve been wavering over the decision to moving into a new home versus renovating your current home; or maybe you’re planning a sale this year and thinking of making improvements to improve the home’s appeal- here’s a resource to help. According to the Remodeling 2011–12 Cost vs. Value Report (www.costvsvalue.com), you can get an idea of how much return on your investment you might get from some of the most popular renovation and addition projects that people undertake.

The 2011-2012 Cost vs Value Report, published annually by Remodeling Magazine, is now available and compares the top remodeling projects and the value that you might recoup at resale. The Cost vs Value ratios were collected for major cities/regions across the country. While project costs were obtained from a construction estimates database compiled by Home Tech Publishing, the project resale values were obtained through a National Association of Realtors® survey of appraisers, agents and brokers.

It is noted that a project Cost vs Value ratio is typically higher in “hotter” real estate markets, and can sometimes exceed 100% (recouping more than was spent on the project at resale). This idea is consistent with the annual Trends in Cost vs Value, which indicates that the average return on investment was higher when the housing market was at the peak in 2005. Of course a major reason for decline in the Cost vs Value ratio from the peak has been the retreat of home prices nationwide. There is speculation that since the national ratio decreased less this year than recent years, the housing market may be bottoming out.

Besides differences in local home prices, differences in regional Cost vs Value ratios can also be attributed to variances in labor and materials costs. Some experts point to a glut of construction workers who are seeking work as a reason for decreased labor costs in some areas; while material costs have not changed much or have become more expensive.

The Cost vs Value Report groups the Washington DC area in the South Atlantic region, which was ranked as the third highest Cost vs Value ratio out of nine regions. The South Atlantic region averaged a ratio of 67.3%, while the highest performing region was Pacific with a ratio of 71.3% was and the lowest performing region was the West North Central with a ratio of 49.5%.

Enough of the technical stuff…
The top Cost vs Value ratio midrange job for the Washington DC area is a garage door replacement, which is estimated to recoup about 93.2% of the cost at resale; followed by a wood deck addition, which is estimated to recoup about 91.3% of the cost at resale (compared to a composite deck addition which is estimated to recoup only 78.8% of the cost).

The top “upscale” project is a fiber-cement siding replacement, which is estimated to recoup 89.7% of the cost at resale (compared to foam backed vinyl siding, which is estimated to recoup only 78% of the cost). The “upscale” garage door replacement is estimated to only recoup 81.4% of the cost (compared to the replacement described above).

Additional projects and descriptions of the projects with costs can be viewed in the Cost vs Value Report. The full Washington DC area renovation/addition Cost vs Value report can be downloaded at costvsvalue.com.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 2, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Renovation considerations

If you’re considering giving your home a makeover, you’re not alone. Desires to modernize and renew your home may increase as the years go by and trends and styles change.

There are plenty of options to make your home feel fresh as well as increase your enjoyment while in your home. Before you begin, there are two considerations that might cross your mind: “how much of a budget do I have?” and “what upgrades recoup the highest percentage of the cost if I decide to sell my home after I make the improvements?”

First, have you been saving for renovations? It is very important to create a renovation budget to fit your financial picture, and then stick to it. Even modest improvements can meet your needs, so don’t be tempted to go beyond your initial plan or over budget.

When renovating/upgrading your home, consider the long term resale value. Today’s designer trends could become tomorrow’s designer don’ts. Whether you’re planning a minor kitchen upgrade or planning a major addition, design experts have often recommended that home owners consider substance and function over style.

Before working on your home, Mark Anderson (2011, The designer discount. MoneySense, 13(1), 63) discusses the need to consult with a professional designer to assist you in your renovations. He suggests that many home owners who design their own spaces tend to focus on what’s trendy at the time without consideration of the fact that most trends are short lived. The longevity of the freshness of your upgrades can depend on your improvement choices.

The most sought after home improvements have typically been in the kitchen. The kitchen tends to be of major focus because it is a room that many people use as the hub of their lives. You might observe that trends are increasingly transforming the kitchen from a meal center to a lifestyle center by centralizing one’s daily activities around the room (as can be observed by adding shelves, built-ins, and computer desks as well as removing walls between the kitchen and other rooms). When updating the kitchen, experts warn not to go overboard as modest upgrades are often enough to increase your enjoyment.

When selling a home, curb appeal is always a consideration. So it’s no wonder that home owners typically go for the facelift equivalent by updating the exterior by replacing exterior doors, windows and siding. Not only can new exterior doors, replacement windows and siding give your home a fresh and modern look, these items could possibly add to your home’s overall insulation efficiency.

So, now that you’ve spent your money, you’re probably wondering “how much can I get back if I decide to sell my home?” Remodeling Magazine (remodeling.hw.net) publishes an annual “cost vs. value” report that provides regional estimates and averages of improvement costs and the estimated average amount that could be recouped if the home is sold at time of improvement. The magazine estimates that for our region, a minor kitchen upgrade could cost around $20,000 and might recoup about 74% of the cost at resale; while a major kitchen upgrade could cost about $55,000 and only recoup about 68.7% of the cost. Additional recoup estimates include: 102% for the cost of a front door; 72% for the cost of new siding; and about 71% for the average cost of replacement windows.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.