Last week I received a call from a homeowner “Tom”, after he met with his financial planner. The financial planner asked Tom about his home equity. Tom didn’t understand what his house had to do with financial planning; after all he had a 401k, and a savings account.
The financial planner explained that the difference between what Tom owed on the house and what he could sell it for, minus selling expenses, is the equity; which is like money in the bank, and for most homeowners it is a substantial part of their retirement plan.
Tom got excited about the prospect of finding “hidden money” in his home and thought he would like to borrow against it. He bought the house in 2007 for $330,000 and made wonderful improvements. He contacted his bank, and hired an appraiser to find out the current value. He was shocked to see the house appraised for $330,000 which was the same price he paid for it 9 years earlier.
Tom was referred to me, by a mutual friend and wanted my advice. He showed me the new swimming pool, landscaping, fence ($50,000) the new kitchen ($45,000) the new wood floors, paint and new ceilings ($20,000). The improvements were beautiful and they loved their pool.
This was the oldest house on the block with a 1 car garage, gravel driveway, old siding, windows, and mechanicals, near a busy road.
I reviewed the appraisal with them and explained that the appraiser selected 6 comparable properties within a one mile radius that sold recently, and he added and subtracted values from the sales prices for individual features; i.e. one home sold for $350,000 but he deducted $20,000 for its lake view. Another one sold for $340,000 and he deducted $10,000 for a 2nd stall garage. There was added value of $10,000 for Tom’s kitchen remodel and $10,000 for the pool. After all the adjustments, the appraiser determined Tom’s current value at $330,000.
Tom said, he watches home improvement and flipping TV shows, and he had the impression he would make money if he improved the house. I explained the cost vs. value of the different types of improvement projects, and the importance of getting a market analysis before improving a home. In this case Tom spent $115,000 and was given $20,000 in value for those improvements. Tom purchased the home 1 year before the market crash of 2008, and he bought the most expensive house on the block.
If your home is part of your financial plan, contact an experienced real estate agent for a market analysis before remodeling to estimate the current value and post remodeling valuation.
Ask the Real Estate Agent is a weekly column by Cheryl Kempenich of Coldwell Banker Burnet, who lives and offices in the Chisago Lakes Area. Submit your questions to firstname.lastname@example.org. All information is deemed reliable but not guaranteed. For legal assistance consult an attorney.