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.