 Remodeling Finance Notes
|
|
|
|
 |
|
|
|
Home
Improvement Considerations
- Question:
the cost to improve your existing home
— will you get a good return on
your investment (ROI)?
— or in other words, would you get
a better ROI if you bought or built a
new home that satisfies your home improvement
objective?
Answer:
a positive ROI will depend
on
several factors, namely,
1) type and cost of renovation
2) market valuation, and
3) home comparison
these factors are described below:
Type and
Cost of Home Improvement
-
This can be accomplished with a new paint
job or a new floor. These types of "home
improvement" projects do not necessarily
impact your home value assessment and
generally result into a neutral ROI.
These type home improvement projects can be
very expensive. Depending on your area
and type of renovation, your product could result into a positive or
negative ROI.
-
- on your neighborhood,
- value assessment of surrounding
homes,
- the positive growth of the community,
- and the personal tastes of the area.
Market Valuation
-
If home prices are increasing, a home improvement
project may add a percentage value to
your existing home value.
If the market values in your particular
area are decreasing, a home improvement project
may fail to add any new value to your
home.
Click here
to make a quick assessment of market values
Home Comparison
-
You might find that your type home improvement
doesn't fit your neighborhood look, which
can in some cases decrease the overall
value of your renovation investment.
|
Predicting Neighborhood Values
- Question:
are there any indicators that can help
predict the future movement of home values
in your neighborhood?
Answer:
nobody can predict market movements. A
number of unforeseen developments can
impact neighborhoods and home values.
The most reliable predictor is a "qualitative"
review of several factors, namely:
Check Your Neighborhood
Potential threats such as a new highway
construction or other "non-neighborhood"
construction may impact your area's future
home values.
What was once a quiet neighborhood can
easily be transformed into a noisy shopping
center with increased traffic.
Lookup county and city governments for
zoning changes:
http://www.statelocalgov.net
Make Sure Your
Boundaries are Secured
-
Are they secured? An open field could
potentially mean future development that
could be positive or negative.
What is the boundary between commercial
property and residential property? Are
the commercial zones inching closer to
your neighborhood? Are there secured boundaries
that will halt commercial encroachment.
What about the roads you live on. Are
they the main thoroughfares for your neighborhood.
What is a quiet road can easily become
a heavy, undesirable road with increased
development.
Estimate the Commuting
Time
-
What about other commuters who may be
interested in your neighborhood? Does
your neighborhood allow easy access to
commuting facilities and highways?
Also investigate what might happen if
you change your current job. If you are
planning a job change within a few years,
you might at least consider the purchase
of a new home instead of a major home
renovation.
Map your commute:
http://www.mapsonus.com
Check current traffic conditions:
http://www.smartraveler.com/
Check your local transportation options:
http://www.apta.com/
Check the Schools
Any positive home improvement ROI will depend
on the quality of schools in your area,
particularly elementary schools.
Investigate the average class size, the
facilities, and the method of transportation.
Evaluate the overall quality of the public
school system.
Locate schools servicing
your area. View calendars, menus, contact
information, etc.:
http://www.asd.com/
Compare schools:
http://www.theschoolreport.com/sr_home.html
another listing:
http://www.schoolmatch.com
Do Some Shopping
Can you buy a loaf of bread quickly, or
must you travel long distances for basic
items?
Further evaluate the quality of merchandise
being sold in the stores. Quality merchandise
indicate a more stable and upscale market.
Search your local market:
http://www.switchboard.com/
another listing:
http://www.mapquest.com
Walk the Neighborhood
Pay particular attention to your neighborhood's
boundaries such as a highway, park, campus,
or other fixed structures.
Check to see if the homes in the neighborhood
are increasing or decreasing in value.
It is a good idea to determine the demand
for homes in the neighborhood. Too many
"For Sale" signs are a good
indication that something is happening.
Find the value of existing
or future homes:
view our
market valuation page
Calculate Housing
Fees:
Check the Negatives:
Check for negatives that could potentially
devalue a neighborhood.
Rising neighborhood crime. How effective
is the crime watch programs in your neighborhood?
http://www.homefair.com/calc/crime.html
Evaluate how traffic patterns have increased,
if any. Are there any potential growth
or changes in any underdeveloped areas
surrounding the neighborhood that can
increase traffic?
such as airline traffic, nearby factories,
major throughways, and ball parks.
such as power lines, radio and television
towers, auto and bus fleet parking lots,
ball fields that play night games, and
salvage yards can devalue homes.
These units may be miles away, but a down
drift could affect the quality of air
in the neighborhood.
Some neighborhoods have multiple personalities
and attract different crowds during the
day.
|
Calculating Your Current Home Value (Equity)
Home improvement
percentages around 20-30% are acceptable
ranges for most neighborhoods. Again,
this will vary by region and by type of
renovation.
For example, if your current home value
is estimated at $200,000 and your home
improvement cost is $40,000, your home improvement
percentage is approximately 20% of your
home value and is acceptable for most
neighborhoods.
Renovation projects above 30% of your
home value are not generally acceptable
for most neighborhoods. The cost would
be better spent on the purchase of a new
home. Of course, this can vary by type
renovation and location.
Calculating
Your Home Value:
The simplest way to calculate your estimated
home value is to take the sales value
of similar homes in your neighborhood.
If homes in your neighborhood are selling
for $200,000. Your home value may be similar
to that price.
Home values can vary depending on your
location (homes on cal de sacs bring a
higher value than homes situated on busy
streets).
View our
market valuation page to estimate
your home value.
Getting a
Home Appraisal:
These individuals will estimate your home
value based on a review of your home and
neighborhood, value assessments from real
estate professionals, and a number of
other valuation tools and appraised reports.
Appraisals cost can vary, depending on
the type of appraisal and area. An appraisal
will likely be required if you apply for
home renovation financing.
View our
appraisal page for finding online
and local appraisers.
Calculating
your Equity Value:
- The calculation is simple. Take your
market value and subtract the amount you
still owe on the home including any home
equity balances or second mortgages.
Link
to calculate your equity value
Calculating
Your Borrowing Potential:
It is the amount lenders will lend
you based on a percentage of your home
value minus any existing home loans that
you still owe.
For example, if your home value is $200,000
and your existing mortgage balance is
$100,000, your equity value is $100,000.
At 100% LTV, you can borrow the full amount
of your equity value. At 70% LTV, you
can borrow 70% of your home value minus
existing mortgage balance ($40,000 in
this example).
Lenders generally lend money at lower
rates for lower LTVs.
Open
our LTV calculator to estimate your borrowing
potential
|
Calculating Your Home Improvement Costs
In areas where labor costs are tight or
where there is a lot of home construction
activity, your home improvement costs can be
high.
Expanding your home's physical structure
is more costly than making an internal
home home improvement change.
Home expansion may require roof extension,
exterior siding, insulation, wiring and
plumbing, and room decorating.
— construction materials
— construction labor
— permit fees
— decorative enhancements
— repairs due to home improvement
— cleanup
Your contractor should provide these costs
when they submit a bid. Make sure you
review the bid carefully to ensure that
all costs have been included: view
our section on estimating costs
- All required permit fees.
- Labor costs and total hours required.
Make sure costs include payroll taxes
and workers' compensation insurance.
- Tools and construction equipment.
- Safety equipment such as hard hats,
dust masks, gloves, and goggles.
- Materials — includes lumber,
plumbing fixtures, flooring, cabinets,
paint, insulation, tile, countertops,
heating, and ventilation units.
- Incidental repairs that may be required
when tearing into the existing house
structure.
- Cleanup including rental bins, removal
service, and dumping fees.
- Decorative enhancements such as
light fixtures, window coverings,
and other specialty decor items.
- Subcontractor fees — fees
from a specialized contractor such
as an electrician.
- Other expenses — may include
upgrades and changes.
These costs are best estimated when
you supply the contractor a complete
project specification plan. Download spec plan.
|
Estimating Your Payback Figure
But you would it would be nice if the
home improvement investment has a positive return
on your resale value.
The increase
in home value from a home improvement project
is determine by the type of home home improvement
and regional area. Another factor is determine
by the neighborhood assessment
as discussed above.
You can estimate the possible value percentage
using this payback estimator. It will
show the type of renovation and region
and estimated payback for your investment.
see
home home improvement estimate assumptions
|
Calculating Financing Costs
- The Monthly Payment Calculator estimates
the monthly payment on an amount borrowed
at a term and rate.
- The Affordability Calculator estimates
how much your can borrow on a fixed
monthly budget at a term and rate.
|
Tax
Benefit of Home Improvement
IRS-related publications
and forms for homeowners:
|
|
|
