Home improvement projects are providing the solution to the housing market slump across the nation, as savvy investors and homeowners are fixing up their properties to rebuild their equity. However, these three simple, innocent mistakes could cause your home improvement project to backfire disastrously on you.
Innocent Home Improvement Mistake #1: Ignoring the comparable properties in your neighborhood.
Many homeowners, especially first time homebuyers who are looking to buy and renovate a house, fail to recognize the importance of the other properties in the neighborhood. This is truly an innocent mistake, but it’s crucial to the success, or failure, of a home improvement or home renovation project.
The real mistake comes when the homeowner attempts to renovate the house above and beyond the quality or size of the other houses on the block. In the world of home improvements, you definitely do not want to be the biggest house on your street. Similarly, you will waste money on renovations that install luxury items well beyond the quality of the other homes’ finishings.
When executing a home improvement project, your home’s final market value is going to be based entirely on a comparison between your home and the other homes in your immediate area, such as on your street. If your home is so far above and beyond the other houses around you, then it becomes impossible for an appraiser to adequately compare them. Once this happens, the appraiser is forced to default to the value of the lesser homes.
To a real estate novice, this seems unfair. It might seem reasonable to a newbie that a neighborhood that has 2,000 square foot homes selling for $ 200,000 will bring a value of $ 400,000 if a 4,000 square foot home is built. But, it doesn’t work this way. Instead, the 4,000 square foot home is judged as being completely out of place for the neighborhood due to the fact that there are no truly comparable homes by which to estimate its value.
Of course, this is an extreme example, but the same principles apply when trying to decide what finishing items to install in your home improvement project. What cabinets, appliances, countertops, etc. will be best to put in your new property? If you are going to go overboard, recognize that you will be spending lots of money on items that aren’t going to bring a strong return in value.
So, what can you do to protect yourself? The key is understanding a real estate appraisal. Even better, take the time to learn how an appraisal for a home renovation loan is going to work. If you do this, then you’ll see the best way to fix up a property to maximize the return in value based on comparable properties in your area.
To get a feel for the appraisal process for a home renovation loan, speak with a qualified loan officer about the process. He or she should be able to give you specifics of what the lender will look for when reviewing an appraisal for a home improvement project. If commit to spending too much money on the renovation, and the appraisal doesn’t come back high enough, it will translate to extra cash out of your pocket to close on the home improvement loan. So, speaking of home renovation lenders, let’s take a look at the second most common mistake.
Innocent Home Improvement Mistake #2: Working with a Lender that Doesn’t Specialize in Home Renovation Loans.
If you are considering a home improvement project, whether you want to buy and renovate a home or whether you want to fix up the home you already live in, then you will want to work with a lender who knows home rehab financing inside and out. Unfortunately, many borrowers make the mistake of walking into their local bank that they have worked with in the past. But, if that bank doesn’t specialize in home renovation loans, then the borrower suffers endless delays and frustrations, as well as pays too much for the financing.
It’s not that these lenders are purposely trying to cause problems. In most cases, they are probably scrambling to do their best to provide the home renovation financing. Unfortunately, they just don’t know the programs to use and don’t have the licensing for them. For example, in today’s mortgage industry, one of the best home improvement financing programs is the government insured FHA 203(k) loan. Not all lenders are approved to use the FHA program, and almost none are approved for the specific FHA 203(k) home renovation loan.
Therefore, one good question to ask your lender is whether they specifically provide FHA 203(k) home renovation loans. If they say yes, then you should ask them if they can provide both the FHA 203(k) Streamline program as well as the full FHA 203(k) rehab loan. There is a difference between the two, which can prove vital to your project’s success. Therefore, if your lender can’t answer these questions to your satisfaction, keep looking.
You wouldn’t go to restaurant to get a tune-up for your car. Likewise, you shouldn’t go to a bank that doesn’t specialize in rehab loans for your home improvement project. It’s crucial that you work with the right people, which brings us to the third mistake.
Innocent Home Improvement Mistake #3: Hiring the Wrong Home Improvement Contractor.
Nobody intentionally hires the wrong contractor, which is why this mistake is truly an innocent one. However, it’s pivotal to the success or failure of any home improvement project.
Most people hire a contractor based on one or two phone conversations. There is typically very little research performed and very little to no comparison shopping completed. The only right way to hire a home improvement contractor is to get bids from multiple (at least three) contractors based on a list of job specifications that you have prepared for your project.
If you do the bidding process properly, you will have an apples-to-apples comparison of the prices and services offered from the contractors. And, you will immediately see which contractors can communicate and work with you professionally. If you fail to take this step seriously, because you are rushing to get to the actual rehab work, then you will probably end up with a contractor who is going to under-perform.
Remember, it’s your project, and nobody is going to care about its success as much as you do. So, take the time to get the proper bids from at least three home improvement contractors. If you are unsure of how to go through this process, speak with your loan officer. Fortunately, if you followed the advice from this article, you will be working with a lender who specializes in home improvement projects.