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Early in 2011 we were interviewed by a couple who was looking for someone to design and build an entryway addition on their home. At our first meeting, I had explained to him that the home finance world had changed substantially in the last few years so that needed to be a forefront part of the equation on any remodeling project. Yet, the owner assumed that since he had looking into obtaining financing for a project several years earlier that getting financing now would be no problem, so he paid our retainer fee to develop a few different designs. A couple of months later, after exploring several options with varying budgets and deciding on the best one for his home, the owner decided to go procure the needed funds. After several months of exhausting financing avenues he sent me the following email (paraphrased):
Client ‘Bob’ “Given the financing situation and the current estimated costs, I would have to put up too much of my own money, which is much more than I want to put into this project. Funny how 5 years ago they probably would have financed 90-100% of the amount with no questions asked, but unfortunately this isn’t 5 years ago.
At this point I can think of only a few options:
- Forget about the project altogether and cut my losses.
- Wait a couple years until home values rise and / or I have more equity in my home.
- Significantly redefine this project
- Or, shop around and see if it can be done for less.”
My reply was as follows:
“Hi ‘Bob’,
I understand your sentiments as these are the issues that are common on almost every project that we deal with that are different for everyone than what was happening 5 years ago. But it is a new time so we need to make decisions based on today’s realities. A couple of thoughts regarding your options.
- If job security or being able to keep up on the new payments is an issue it makes sense to not do the project at all.
- If it is primarily about short term resale/ROI, a minor amount about livability and increased satisfaction, it might make sense to not move forward unless you are fixing something that is broken; such as a leaky roof, drafty windows, or a really bad design flaw.
- If it is about making your home more livable and attractive, and about salability in the long term, it probably makes sense to look at how to move ahead.
On the affordability question you might consider this. While we can’t be certain about future home values and while past performance is not an indicator of future results (probably a good thing) we do know a few things about today:
- Homes in the Twin Cities are and have been being built (for about 3 years and likely to continue) at a rate that is about 1/4 of what they were at the peak of the boom and about 1/2 of what our demographics experts say are sustainable number, meaning our excess housing inventory is steadily being absorbed.
- Most consumer goods are increasing in price at a significant inflation rate.
- Most building materials are increasing in price faster than the stated inflation rate. So, by waiting for home prices to rise to create equity, you might find that the additional equity is more than eaten up by the increased cost in doing your project later. On the flip side of that coin is that you might have significantly paid back the loan to do the project now and would have the chance to enjoy the project that many years more.
Another approach is to allow us to redefine the scope of your project to align with your targeted budget and priorities. This method has worked for some of my other clients in the past and that would be to establish a “not to exceed” budget and let us show you what we can do for that dollar figure. We would then propose a project that we think might make sense and of course you would decide if that might make sense to you also.
Lastly we could phase your project so that we could address the most important goals now and then complete the project over time. You could also consider assuming a more active role such as stepping in after we get the structural and exterior phases completed and then take over the interior finishes (say after drywall). You could then do some of the items yourself. Or, you could contract out some of the components over a longer time frame to pay as you go and save some dollars by doing some of the items yourself.”