A lot of people have asked me how we financed Mold Palace, so I thought it was worth discussing here, lest you all think that we're dripping in dollar bills. If you are dripping in dollar bills, you can bypass this post and can find another essay I've penned--I highly recommend anything and everything else I've written, particularly that essay about sending dolla bills to your fav blogger for her eloquence and subtlety 😉
Moving on.
First step is to find your own horrible house. The degree of horrible depends on you: it could range from orange shag carpet with 70s wallpaper to raccoon infestation and mushrooms growing on the walls. Pick your poison. Remember that ugly can be fixed, but serious foundation issues (while fixable) should be avoided. Yes, even the woman who bought the moldy raccoon house has standards.
Okay, you've found your horrible house. You're excited and terrified and wondering if it makes financial sense to drop some money on this heap. You crunch some numbers, talk to some lenders, negotiate the purchase price. You look at some comparable homes in the area to see what they've sold for in the last 6 months to 1 year to see if you'd get a return on your investment. You obsess over Pinterest and floor plans and finishes and unleash all your internal conflict onto your friends. You talk with some contractors to get an estimate on what it'd take to actualize your vision (or Phase 1 of your vision). You discuss this house in great detail with everyone from the mailman to the cashier because you've noticed that your friends have been avoiding you lately (what's up with that?).
The estimates look good, the appraisal came in with her numbers, the lender is willing and you sign the dotted line. And then panic sets in: WHAT HAVE YOU DONE!?!?
Lenders
You're number crunching and conversations with your lender will help you choose what kind of loan is best for you. While every lender is different, you will likely need to provide them with the following:
- copy of signed offer to purchase
- most recent federal taxes and W2’s
- two recent pay stubs
- two months of bank statements (checking/savings/mutual funds/retirement, etc)
- copy of contract/bids/blueprints of remodeling
- estimated final loan amount (total amount of loan when remodel is finished)
- an appraisal of the house
So what is an appraisal?
An appraisal is an estimate of value for a property, which is required by the lender and paid for by you (ranges from $350-$500 typically). An appraiser will come to the house, snap photos of the exterior and interior, and write a very detailed report of your house and its amenities. Your house will be compared to similar nearby homes that are either on the market or have recently sold. Based on your home's amenities and the sale value of comparable homes in the area, your appraiser will indicate a value for your home. Every lender requires an appraisal because they aren't going to lend money if the house doesn't have the value to back up the amount you want to borrow.
Our house was on the very far end of the horrible house spectrum. It had no plumbing, heating, or functioning water lines; the roof leaked; the basement was moldy; plants grew out of the gutters. So when we had the appraisal done, we had it appraised "as completed", which means that the appraiser had a written copy of the work we planned to do (new kitchen, kick out the raccoons, add a bedroom, etc.) and she appraised it as if that work had been completed. The sticking point with this approach is that you're required to go through with the scope of work that was written out at the time of the appraisal. Here's what I mean: if you indicate that you're going to put marble countertops in your kitchen, you can't decide later to switch to laminate because the appraiser indicated the home's value based on your marble countertops. Or, if you say you're going to add a half bath, you have to do it because the bank lent you the money based on the value of that extra half bath.
Special Appraisal Considerations
Our house was a tricky house to appraise. It's on a block designated on the National Historic Registry, which means that the appraiser should be looking for comparable homes that are also on the historic registry in a nearby radius, if available. Our appraiser actually had to do our appraisal twice, because she was not aware of its historic status and therefore didn't look for those comparable homes. It worked out well for us, because the second appraisal came in higher than the first.
I want to mention that we did change our scope of work slightly during the renovations. We had planned on renovating the attic space into a master suite in the future, but when we received the appraisal back, we asked our contractor how much it would be to renovate that space as well. We got the numbers from him and asked the appraiser what the value would be with a 5th bedroom. The value added greatly exceeded the cost of the renovation, so we decided to go for it. I say that with this caveat, because I want people to make wise financial decisions: the house next door to us sold the year before, and it is a very comparable home to ours. We wanted to be financially conservative and not borrow all the money we could--we wanted to leave some on the table. We knew the house next door had sold for X and the amount we were borrowing was significantly less than that X, so we felt comfortable with the amount we borrowed to allow for the master suite. Of course, you should talk with your lender and financial advisor for further information, but I wanted to add that detail.
Insurance Considerations
Your insurance agent will need a copy of the appraisal report once it's complete so that she has details on square footage, etc. Our agent needed a day or two turn around time after receiving the report to insure us. Before you can set up a closing date, you will need to obtain home owners insurance for your new home Some insurance companies won’t insure vacant properties, so make sure you give yourself enough time to find an agent/plan before the closing.
Renovations & Lien Wavers
So, you've closed on your house and now the renovations begin! You're back on speaking terms with your friends again because you've become a more tolerable human now that you're not obsessing over paint colors and closet placement.
At closing, you opened your loan for the purchase price of the house. You now also have a second loan for the renovations. Your contractor will require a draw to begin the work (usually around 15% of the renovation cost, but this varies), and your lender will likely have the check prepared for you to hand over to the contractor at the time of closing.
Your contractor should be aware of lien wavers, but you need to be also. A lien waiver is a document signed by the contractor, stating he received payment for work on your project. A lien waver should be signed by all sub-contractors as well, which means that all the people (plumbers, electricians, drywallers, painters) hired by the contractor have been paid. Make sure the following items are stated on each waver:
- Signature of contractor or sub-contractor (sometimes it is best to also print their name or company below the signature so it's legible)
- Date of signature
- Dollar amount paid
Each time you pay your contractor out of your draw (which is a check cut to them for their work), have your contractor sign a lien waiver to indicate that he was paid for the work. You will need to hang on to all of these wavers because they show proof of payment. Also, you'll need them to show the total amount of the money spent at the end of the renovation.
You may obtain your draws from your lender or a title company. It saves you some money to get the draws from your lender rather than from a title company because a title company charges per inspection. If someone from a title company has to drive to your home to make sure the work is completed, they may charge up to $300 per draw. So if you have 5 draws like we had, you could be looking at up to $1500 in fees. BUT if you use a lender to obtain your draws, then the responsibility for obtaining the wavers falls on you.
Final Closing
The renovations are done, everyone is paid and you're loving your new shiny place. Now it's time to roll the loan for your house and your construction loan into one fixed interest loan. The title company will require you to sign a affidavit document asking if ANY work has been performed on this property in the last 6 months. Of course you will have to say yes. In that case, they will want to have copies of all the lien waivers for the work, and a final lien waiver from your contractor stating that the work is completed and ALL bills have been paid. If a bill is not paid, the unpaid person may file a “lien” against your home for non-payment which may mean you can't get the mortgage until that payment is addressed.
Other Notes
What I've discussed here was our loan and our experience approximately five years ago. Loans vary depending on region, credit, and scope of the renovation, but think of this as a guide to those of you considering your own renovation project.
Be smart: not every house in a good investment or worth your time, no matter what Pinterest says. Don't let your finances or relationships fall apart because of a dumb house. What people say is true: renovating will always take longer than you think and cost more than you want. There will be unexpected, unwelcome surprises during the process. No one wants to spend money tuckpointing a chimney, because no one notices your chimney. You'd rather spend your money on some sweet cabinet hardware, I get it. But if you don't tuckpoint that thing, your whole stupid chimney will come a-falling down on a windy day and won't you feel ridiculous?
Good luck!
