Are You Gonna Go For It? Renovation for Real!

After you get the estimates back from the contractor, compare it with the renovation budget your lender has approved.  Your lender will likely add a 5% reserve to the loan, just in case there is an overage, but don’t rely on that.  Pretend like it isn’t even there for now.  Use the original figure when planning the project.

As a caution, (and don’t make me say, “I told you so”) I would suggest that you have additional funds reserved for unexpected expenses that may arise as you start the project. Ideally, I would suggest you have 10-20% of the renovation budget as a “cush” fund to fall back on.  Once demolition begins, you never know what might be lurking behind the walls that may have been missed during the inspection. And once you start picking out fixtures, appliances, etc., you may want to choose more upgrades than you originally planned.  The original budget may or may not be high enough to allow for the higher end selections.  And unless you have a really good idea what materials and supplies cost, you may have more than a little stress when you go to pick out your favorite bathroom faucet and find out that it is $468 and you need two of them for the master bathroom and three for the other bathrooms.  Or that the super cool farm sink you pinned on your Pinterest “Dream Home” board is $1,368.  And who pays $468 for a toilet? YOU DO!  Because you want to impress your guests when they use your brand new guest bathroom.  They are going to think you are a pretty big deal when they see that you have (in not one, but all four bathrooms) comfort-height, low- noise, super-duper-non-cling-pooper-removers.  Ok, so give me a break----At least I didn’t pick out a $1,500 throne that washes and dries ones hind end with the push of a button or two.  I have rugs and throw pillows to buy, too, you know. 

Oh, and something else to think about….What if you aren’t in the house by the pre-determined date, and need to pay for housing while it is being completed?  We weren’t in by the deadline, and stayed in a hotel for 3 weeks before it was ready for us to move in.

As we started our renovation, we ran into a couple snags along the way.  (Like I mentioned in the beginning of this blog series:  Renovation has good, bad and ugly sides!)  We had originally planned to do the kitchen during a later phase so we could go crazy and go top of the line with everything.  We were going to go ahead and have the floors done and the walls painted, but put the old cabinets back in until we could afford to do a kitchen that was off the chain.  (I have my eye on an unbelievable gas range that costs more than my first car.)  Unfortunately, when the cabinets were removed, we discovered many of them were damaged on the back side, due to a water leak under the dishwasher.  So we had to go ahead and replace the cabinets now, instead of later.  If you have ever priced custom cabinets, you know they are not cheap.  This was an expense we had not prepared for in the original budget.  We had to either come up with more money, or shave some off other areas of the project.  We got the cabinets, but the range will probably come after my youngest graduates from college, gets married and has three kids! 

Surprise Number 2:  The few leaks in the roof were more extensive than we thought.  We thought we could patch the roof for now, then replace the whole roof as part of Phase 2.  The inspection revealed a couple areas of concern, but it wasn’t noted as needing immediate replacement.  In order for the roofer to guarantee the repair, the whole roof had to be replaced.  We didn’t want to spend the time and money putting together a beautiful home only to have it at risk of getting damaged by a random roof leak.  So….surprise expense #2?  A total roof replacement.

Surprise Number 3:  The HVAC worked fairly well during the home inspection, but it was recommended we consider replacement more sooner than later.  When we had the HVAC checked as we were getting close to our move-in date, they found that the air would cool for a couple hours, then it would quit.  If you have ever spent a summer in Charleston, SC, you know that a two-hour cooling session and then nothing, might as well be nothing at all.  And if you know anything about 50+ year old women, you know it doesn’t have to be summer in Charleston, SC to know that you need a high-functioning, highly efficient air conditioning system no matter what time of the year.  So to keep mamma happy so everyone else in the house is happy?  Enter surprise expense #3:  A total HVAC replacement.

These are just a few examples, but as you can see, we are already getting up in numbers. 

As you are looking at whether or not this is going to be a good idea, have your Realtor run the comps to see what other move-in ready homes in the neighborhood are selling for.  If the numbers are higher than what you will be paying for the house plus the cost of the renovation, then you are in good shape.  The bigger the spread the better.  Using the example from before:

Purchase Price:  $225k + Renovation Budget: $75k + Personal Reserves: (10-20%) $7,500-15,000 (Let’s use the higher figure of $15,000 for this example.)= $315,000

Neighborhood Comps:  $375,000 - $315,000 = $60,000 Net equity

Is this a good value?  YES!

NOTE:  When you move forward with the purchase, the appraiser is going to use the comps in the neighborhood and determine the value of YOUR property based on the total loan, which is the purchase price PLUS the renovation funds.  He will value the property based on what your contractor proposal states will be completed.

Next week, we will look at how to stay organized and sane throughout the process.  In the meantime, give me a call at 478-973-2684, text, email me at Janie.pugh@carolinaone.com or comment on these posts if you have any questions or would like to discuss purchasing a home to renovate.

Lovin' Life in the Low Country,

Janie

My mission statement:  To live each day to the fullest, with excitement, enthusiasm and a strong desire to build a successful and highly respected real estate business, earned by developing relationships through consistent and predictably high work ethic of always going above and beyond, and always doing so with a creative surprise up my sleeve.

Doing Your Due Diligence: Renovation for Real!

You are pre-qualified and know what you can afford.  After scouring the listings and looking at properties, you have found the perfect house!  When you write an offer on the desired property, be sure to include a period of due diligence of two weeks or so.  This will give you the opportunity to take care of several necessary steps to ensure you want to move forward with the purchase.  Due diligence is important whether you are buying a property to rehab or one that is move-in ready.

The first two things you need to address are getting a home inspection and a termite inspection.  In a hot market, inspectors are extremely busy, and availability is limited.  You have to get the inspection completed during the due diligence, so start calling inspectors immediately.  The home inspection is a great way to find out what NEEDS to be done as well as providing a “punch list” of things that SHOULD be done, but could possibly wait until later.  The termite inspection will determine if there is any recent or active termite infestation, and if there is a need to address those concerns. A termite inspector can also determine if there is a presence of mold that needs to be further evaluation for potential remediation.  Mold can be a deal-killer if it is extensive, as it can be costly to remove.  And since the property is being sold "AS IS", the seller is not likely to step in to pay for any repairs or removal.  

Soon after the inspection, you need to meet with a contractor to get estimates.  And just as the home inspectors are slammed right now, so are the contractors.  If you haven’t already found a contractor, you need to get busy finding one now!  Ideally, you should have a contractor at the ready before you even start the home search.

After you get your inspection report, you need to go through it and prioritize the items.  We listed our items in 5 Phases:  “HAVE to HAVES”, “NEED to HAVE” (but could wait a bit, if necessary) “Would LIKE to Have”, “ENHANCEMENTS”, and “ICING THE CAKE!” 

Once you have an itemized list of what you need/want to have done, schedule a meeting with the contractor to get estimates for the work.  It is a good idea to get a couple estimates so you can make sure you are getting the best value and quality of work you can afford.  The best way to find a good contractor is word of mouth/referral!

 For our project, our phases looked something like this: 

“HAVE TO HAVES” are things such as electrical, plumbing, roof, HVAC, structural, basic flooring, systems and environmental/hazardous conditions.  If you are getting FHA 203(K) financing, these are items that will be required by the lender. 

“NEED to HAVES” are things such as re-finishing the floors, upgrade to tile shower, new tub, vanities, painting interior, replacing door hardware, replacing light fixtures, gutters, etc.

“Would LIKE to Have” would be things such as a second oven/microwave combo, upgraded appliances, adding laundry cabinets and mud sink, butler’s pantry, bathroom additions, crown molding, painting exterior, exterior lighting upgrades, gas line to outside lights, etc.

“ENHANCEMENTS” would be crown molding, custom window treatments, room additions, adding gas to replace current stove with gas range, landscape improvements,etc.

“THE ICING ON THE CAKE!” would be room additions, wet-bar, extensive landscape improvements, etc.

IMPORTANT TO NOTE:  Not only do you need the contractor to give you estimates for cost, you need timeline estimates, as well.  What is their anticipated date of completion?  Are you planning for the entire project to be completed right away, or are you doing it in phases over time?  If the renovation is for a home that you will be moving into, what is your target move-in date and does it mesh with the contractor’s estimated date of completion?   Always allow extra time for completion, as delays are inevitable.

Based on the estimates as compared to your renovation budget, you can determine how much of the itemized list the contractors can complete up-front, and which items need to wait until a later date.  

Tomorrow, we will cover estimates, comps, value and re-negotiation:  Is it worth the investment?

Lovin' Life in the Low Country,

Janie

My mission statement:  To live each day to the fullest, with excitement, enthusiasm and a strong desire to build a successful and highly respected real estate business, earned by developing relationships through consistent and predictably high work ethic of always going above and beyond, and always doing so with a creative surprise up my sleeve.

Financing Options: Renovation for Real!

If you are buying an “AS IS” home that requires extensive restoration, you will not be able to get traditional financing such as a straight FHA or VA loan.  Depending on the amount of repairs that are necessary, you may not be able to get a conventional loan, either.  Don’t get discouraged thinking your only option in buying a fixer upper is to pay cash.  You have other options:  Renovation Loans. 

When shopping for a lender, be aware that not all lenders offer renovations loans.   If you have a preferred lender that does NOT do them, they can refer you out to someone who does.  Gateway Mortgage is one company that does them. They know the process and do it well.  Gracen Watts is the Charleston-area contact that I work with. Get in touch with her here:  http://www.gatewayloan.com/officers/gracen-watts/

Renovation loans are added to the purchase price of the house, and financed into your mortgage.  FHA offers a renovation loan called a 203(k) loan.  This type loan requires a minimum down payment of 3.5% of the total loan-to-value. The lender will require you to get a home inspection by a 203(k) certified inspector, (which costs 2-3 times more than a regular home inspection), and you will have to get a 203(k) certified contractor to will do the work.  These inspectors and contractors are hard to find, so going FHA 203(k) may not be the easiest route to take.

Another, more cost-efficient, less stressful renovation loan is a conventional renovation loan, called HomeStyle. This loan requires a minimum 5% loan-to-value down payment.  Your home inspection can be any licensed home inspector, and your contractor must be licensed and approved by the lender.    What if you are purchasing the property as an investment that you plan to “flip”?  Your required down payment is 15% loan to value.

Let’s take a look at an example:  Your lender pre-qualifies you for $300,000.  You find a house you want to purchase that your Realtor® has negotiated down to a price of $225,000.   This leaves you with the option to use $75,000 for your renovation budget.  The house will show up as a sale price of $225,000 in the tax records, but your mortgage will be for $300,000 minus your 5% down payment.  The total loan amount you will finance is $285,000.  Once you get the A-OK, thumbs-up, pre-qualification letter from your lender, you are good to go make an offer!  Once your Realtor® negotiates your best deal, all terms are agreed upon, the contract is ratified, and you've performed your due diligence, your lender will order an appraisal.  As long as the post-construction value of the home is $300,000 (the total mortgage, which is $300,000 for this example), or more, you are good to go!

Tomorrow, we will cover what needs to happen during your period of due diligence, prior to the appraisal being ordered.  

For more information about renovation loans and pre-qualification, give me a call and I will put you in touch with a lender in your area that can best serve your needs.  Or contact your preferred lender and they can refer you to someone that services renovation loans. And of course, if you are interested in pursuing the purchase or sale of real estate in the greater-Charleston area, give me a call!

Lovin' Life in the Lowcountry,

Janie

My mission statement:  To live each day to the fullest, with excitement, enthusiasm and a strong desire to build a successful and highly respected real estate business, earned by developing relationships through consistent and predictably high work ethic of always going above and beyond, and always doing so with a creative surprise up my sleeve.

Renovation for Real: Getting Started

Enter HGTV and all its fixer-upper, flip or flop, property brother shows that make it look so easy and effortless.  Just turn it over to the pros and they will move walls and pipes to turn that Pepto pink, mint green, purple carpeted shack into your dream castle.  Piece of cake, right?

Not so fast.  While HGTV has a lot of great reality shows, it IS still entertainment media.  And, as in any renovation project, large or small, there are steps, details, and a lot of “behind the scenes” activity that has to happen to pull off a successful renovation.  The activity you don't always see on tv is the non-glamorous, hard work and stressful details that go into pulling it off.

Now don’t get me wrong:  I LOVE HGTV.  I personally know the creator of the network that launched in the mid-90’s, and admire his brilliant vision that has since become a household acronym.  And by the way...I love me some Property Brothers!  (This was taken at the NAR Annual Conference in San Diego, November 2015.  Too bad I didn't know I was going to buy a fixer upper when I got to meet them!) But reality tv and REALITY are not the same thing.  HGTV is for stimulating vision to share with the experts you will hire to do the jobs you aren’t qualified to do yourself. 

One of the experts you need to start with would be me.  Or, a Realtor you know, like and trust…(And preferably, someone experienced with buying and selling distressed properties).  I am a licensed Realtor.  An expert in real estate.  I am NOT a contractor.  I am NOT a plumber.  I am NOT an electrician.  I am NOT a carpenter.  I don’t lay tile.  I don’t replace roofs or HVAC units.  When you want something done right, you hire an expert.  I can’t tell you how many houses I have walked into that were DIY disasters that could have been avoided had the right professional been hired from the start. 

So let’s get started with the process.  You have decided you want to buy a fixer-upper.  You hire someone like me to represent you as your Realtor, to make sure the purchase goes smoothly from start to finish.  What comes next?

Financing!   How do you plan to finance the purchase of the home?  Are you paying cash or will you need to get financing from a lender?  When you plan to purchase a home, whether it is a fixer-upper or move-in ready, financing must be addressed before you get started.  Knowing your options will help you determine what to look for.

Tomorrow, we will go over financing options that are available.  (You have more options that you think!)  If you have any questions as we walk through the process, please comment or give me a call!  I can be reached on my cell phone at 478-973-2684 or you can email me at Janie.pugh@carolinaoneplus.com

Lovin' Life in the Lowcountry,

Janie

My mission statement:  To live each day to the fullest, with excitement, enthusiasm and a strong desire to build a successful and highly respected real estate business, earned by developing relationships through consistent and predictably high work ethic of always going above and beyond, and always doing so with a creative surprise up my sleeve.

Flip, Flop, Fix, Up...Renovation for Real!

Now that the real estate market is heating up, it seems people are getting excited about buying and selling homes again.  The problem with a hot market is the lack of supply to meet the needs of the people that are looking to buy.  Depending on which market you live, you may find yourself challenged to find that perfect home that fits into your budget.  As a Realtor, I work with clients every day that are frustrated when they can’t find that perfect home.  As a consumer, I recently joined the thousands of other folks in the greater Charleston market in trying to find that perfect home for me and my family.  And we, too, became frustrated.  Homes would come on the market and within days (and sometimes hours) had ratified contracts on them. 

When you move from one market to another (and in our case, from one state to another), you will likely find a big difference is home styles and prices.  In some cases, it will work to your advantage.  In others, if might make it harder to afford what you previously had.  Before getting disappointed, it is important to look at all factors that will affect the ultimate affordability of your new home.  For instance, tax rates vary from state to state, so what may seem like an unobtainable goal is simply a matter of how your monthly payment breaks down.  In our case, we moved from an area where the tax rate was almost three times what it is in our new market.  So we were able to afford a higher purchase price since our annual taxes were so much less.  In order to find out what price you can afford in your particular area, you have to start by getting pre-qualified.  (We will go over that in more detail in the next post.)

So what about a fixer-upper?  Would we be able to get what we wanted if we went that route?  Hmmmm.....

Several years ago, before moving to Charleston, my husband and I started talking about a career goal to expand my real estate business into a family business of buying and selling fixer uppers.  Since I have the real estate expertise, my daughter is an interior designer and my husband has man-power forecasting and project management experience, it seemed like a natural progression for my career.  Little did we know, our first “project” would be our own home that just so happened as the result of a random drive through a neighborhood and seeing a crooked “For Sale By Owner” sign on a house with broken, cobweb-covered porch lights, overgrown ivy-covered brick exterior, but an amazing park-like yard.

Join me for this daily blog-series as we walk through the process of buying a fixer-upper, from start to finish.  Starting with the pre-qualification process, we will move through the day-to-day expectations to celebrating the final product!

Lovin' Life in the Lowcountry,

Janie

My mission statement:  To live each day to the fullest, with excitement, enthusiasm and a strong desire to build a successful and highly respected real estate business, earned by developing relationships through consistent and predictably high work ethic of always going above and beyond, and always doing so with a creative surprise up my sleeve.