Remodeling - Estimating Costs - Financing

Remodeling - Estimating Costs - Financing

How to Estimate Costs

The basic difference in estimating an addition against a complete home will be the increase of some square footage building costs due to the smaller size of the job. Subcontractors may want a little more money for their labor because they could be earning more on a larger job for almost the same amount of time.

The general contractor that you won’t be hiring because you’re doing it yourself would also have charged a greater percentage for profit and overhead. As I mentioned earlier, the National Association of Home Builder recommends that professional builders aim for a 50 percent gross profit margin! The savings you realize by being your own general contractor will more than offset the increase in labor costs from subs.

You should make a list of all the materials the project will need and use the cost estimate spreadsheet on www.byoh.com as a starting point. Obtain competitive bids as though you were building a house and proceed from there.

How to Finance an Addition

Financing an addition could be easier than financing a new home. You may be able to simply get a home equity loan based on the equity you have in your home. (Your equity is the difference between what the house is worth and what you owe on it.) Quite often you don’t even need to give a reason to borrow against that equity because the lender is well protected if you should default. The house already exists and serves as collateral for the loan.

The amount you can borrow varies from lender to lender, but if you have been in your house for at least three years, it is safe to assume you have built up some equity. Typically, you can borrow up to 100 percent of your equity. If you don't have sufficient equity for an equity loan, a construction loan based on what the "completed value" of the house should be the answer.

Financing small jobs can also be done with cash from savings, low interest credit cards, or even a construction loan. Construction loans however, because they are more costly, are usually for larger jobs than a kitchen or bath redo. Generally they are for projects that approach at least a 50% (or more) increase in value to the entire house.

Just as in planning new home construction, your local lender can sit down with you and discuss your lending needs.

Remodeling: Renovation or Restoration

Over the years, finding inexpensive historic houses to buy for the express purpose of restoring them has gotten harder, except in areas that no one wants to live in. It is hard to increase the value of a home through renovation if it is in an undesirable area. The result is you may have to pay too much to make renovation feasible. If the price of the house plus the cost of renovation exceed the fair market value (appraised value), it makes little sense to proceed. You must keep in mind that sooner or later all houses will have to sell.

There do remain a few pockets of desirable older homes, usually in established neighborhoods close to viable downtown areas, where paying more to purchase is rewarded in the end. But the big bubble of the 1980s and 90s is long gone. If you already own a house in need of renovation, however, or have found an appropriate one to buy, here is how to analyze the situation.

1. Make up a budget.
2. Have the house inspected by a reputable home inspector.
3. Determine what upgrades must be done and what improvements you want to make. Consult the inspector.
4. Determine costs by completing the cost estimate spreadsheet just as you would for a new house.

Note: You will find that labor costs in renovation are much higher (as much as double) than with new construction or even additions. This is because subcontractors know that there are often hidden costs in renovation such as finding problems behind walls or making things fit into an existing space. They also know that extra care must be taken when working in an existing house. Don’t worry, though – material costs are the same for either new construction or renovation.

5. Get an appraisal as to what the house will be worth when the work is done.
6. Make your decision based on the appraisal. Will the added cost make the house too expensive for the neighborhood? This will be indicated on the appraisal. If it does, it will be hard to sell and/or you will lose money. The appraisal may actually indicate a value far below your estimated costs, which could be a function of the neighborhood housing values dragging your project down or an indication that you didn't do a careful enough job of estimating.
7. If you do decide to go ahead, follow the same steps for general contracting as you would in new construction as far as obtaining financing, scheduling subcontractors, etc.

Even with small remodeling jobs, it makes sense to act as your own general contractor. After all, why pay a remodeling general contractor to make the same phone calls you can make to the plumber, electrician, tile contractor, cabinet shop, painters, flooring contractor, home center, and so on.

Say you’re planning a new kitchen. Make a list of what you want done. Find corresponding subcontractors for each type of job and get bids from them as well as a list of materials they may need you to supply. Enter all those costs on a spreadsheet and see what it costs with you being the general contractor.

Next get a bid for the whole job from a remodeling general contractor, where all you have to do is write the check. See which way is cheaper. Will your homework and scheduling efforts be worth it? I think you'll find out the answer is yes!