For most homeowners, the pride of ownership includes a
consistent home improvement effort. While this makes sense, be
careful you don't improve the property so much that you can't
recover the costs when it is sold.
Home Improvement
You've picked up a heck of a deal on a home in a nice
neighborhood. The purchase price was $200,000 and you put twenty
five percent down [$50,000]. The comparable homes, "comps", in
the neighborhood appraised for $300,000. Yes, your home is a bit
run down, but that's why they have Home Depot and weekends!
You'll just fix the ugly ducking up and pocket a quick $100,000
in equity when all your projects are done. What a country!
This situation definitely has potential. The value of the home
is so low when compared to the comps that a relatively quick
equity grab certainly looks possible if the home can be fixed
up. Off to Home Depot we go...
Let's do an evaluation of our ugly ducking. Put another way,
what needs to be done to get it on par with the other ducks in
the neighborhood? Okay, we need new doors, new windows and
landscaping in a very big way. The drive way looks like a toxic
dump sat on it and we aren't even going to get into the peeling,
ugly paint on the home. Pricing everything, deciding to use
homeowner labor as much as possible and so on, we find it is
going to run roughly $50,000 to makeover our ugly duckling. It's
going to be a lot of work, but that's what weekends are for. We
should still come out with a $50,000 gain and $100,000 in total
equity considering our $50,000 down payment.
Budgets and Temptation
The problem with the above scenario is it is very hard to stick
to a budget. If you've owned a home, you're already familiar
with this problem. If you are buying a home for the first time,
watch out!
With homeownership, the structure you own quickly evolves into
"my home." Once this occurs, you tend to view the quality of
your home as a statement to the world and you want to show the
world your best. Instead of buying moderately priced cabinets
for the kitchen, you buy custom pieces that would make Bill
Gates envious. Counter tops soon become marble counter tops.
Refinishing the driveway evolves into putting in an entirely new
one with brick inlays. And so it goes.
You are no longer trying to bring your home up to the standard
of the neighborhood homes. You are trying to turn the home into
a swan and swans are expensive. After making all your
improvements, you are distressed to find the total cost being
$90,000 instead of $50,000. For all your hard work and effort,
you've realized only a $10,000 gain in equity.
In Closing
Make sure you objectively budget improvements and stick to those
budgets. While there is something to be said for making a home
glow, make sure it makes financial sense.
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