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.
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.