Budget with an eye toward ROI
An important first step in any fixer-upper involves fast forwarding to the last step: how the reno will affect your home's value, aka its return on investment (or ROI).
The industry guideline on home renos holds that your remodel should cost between 5 percent and 15 percent of the home's current value. The rationale? Spending less than 5 percent could adversely affect home value, while money spent over the 15 percent limit won't return at resale.
For estimated market returns by region for your specific reno, check out the National Association of Realtors' annual Remodeling Cost vs. Value Report. A local Realtor can also provide a community comp (or comparable) for how your reno might affect your home's market value.
Remember that classic reno TV trope where the crew discovers costly surprises in the attic or cellar? Contractor Kenny Grono, president of Philadelphia-based Buckminster Green, suggests homeowners set aside 5 to 10 percent extra as a contingency fund if they're working with a skilled design/build team. If not, 15 to 20 percent might be safer.
"If they're more seat of the pants, you know things will probably come up because you've inevitably overlooked a lot of details," he says.
RATE SEARCH: Looking for a home equity loan or line of credit? First, check out the rates at Bankrate.com.
Hiring a home remodeling team
For the DIY crowd, nothing beats completing a home reno on time, within budget and without forking over 20 to 35 percent for a general contractor.
"If you have the time and ability and are willing to invest in the learning, there's no question you can do it," says Tom Kelly, president of Neil Kelly Remodeling in Portland, Oregon. "But that's three big ifs."
The chief risk for newbies flying solo is, without previous project experience to draw upon, the results may be underwhelming, if not an outright mess. A solid design/build team can take the worry out of remodeling by:
- Translating your vision into a workable, affordable design plan.
- Working up a realistic budget, including 5-20 percent extra for the unexpected.
- Obtaining the required building permits and inspections.
- Sourcing and ordering project materials and cataloging product warranties.
- Scheduling the work crews.
- Problem solving and project adjustments.
Kelly says there are far better, less risky ways to DIY than working as your own contractor.
"Doing the demolition at the beginning or the painting at the end by yourself can save some significant money," he says.
Consider your financing options
Whether you're looking to customize your home to your own tastes or purchase a fixer for resale, you'll benefit by exploring the best way to finance your upgrades.
Brendan Coughlin, executive vice president of consumer lending for Citizens Bank, says a home equity line of credit (or HELOC) makes the most sense for homeowners set on improvements.
RATE SEARCH: If you're looking for a home equity loan or line of credit, check out the rates at Bankrate.com first.
"When you can borrow at a rate of 3 percent to 3.5 percent, that's a pretty inexpensive access to credit, especially if you're going to reinvest that and add value to your home," he says. "We're seeing HELOC's growing at about a 30 percent clip per year. It's back in vogue."
In addition to their typical 10-year draw period, during which homeowners can pay interest only, consumers are free to use a HELOC to consolidate credit card debt or pay for college.
If you're thinking of buying a fixer, the Federal Housing Administration's 203(k) Rehabilitation Mortgage Insurance and Fannie Mae's HomeStyle Renovation Mortgage program can build reno funds into your home purchase.
"A handful of programs require as little as 5 percent down," Coughlin says. "It can be smart to keep that extra money aside for your home improvement."
Understand that location will impact cost
When it comes to fixer-uppers, where you renovate plays a key role in what you'll recoup on resale.
A new analysis by Zillow of some 70,000 fixer-uppers listed for sale around the country finds that homes listed as "needs TLC" sold for 8 percent less on average, saving buyers just $11,000 for renovations. That's barely enough for a wooden deck addition ($10,471), much less a full-blown kitchen remodel ($60,000), according to averages from the NAR's report.
Bargain hunters in relatively expensive locations, such as San Francisco and Seattle, saved the most for future improvements, while those in Atlanta, Miami and Phoenix walked away with minimal reno savings.
"Quite simply, you don't want to have the most expensive house in the neighborhood," says Kelly. "If you're buying a fixer-upper, you want one that is going to be the least-expensive house and then build toward the mid-price point. If you're looking to buy, fix it up and have it be the most expensive house in the neighborhood, watch out!"
Stay on track by avoiding costly missteps
What's the best way to keep your reno on track? Kenny Grono offers these tips to avoid costly missteps:
- Plan big, start small. "Think about your whole house as a system," he says. "That way, you won't spend half of your budget on the bathroom when you have other projects to do."
- Start with a home inspection. If you know you need to update or replace worn or outdated plumbing or electrical systems, you can work those costs into your budget.
- Let your contractor purchase your materials.They'll get a better price than you will, even with their markup.
- Relocate if you can during construction: "Remodeling is a big inconvenience in your life," he says. "It's dirty and there are people in your house all the time who are going to wear on you."
- Don't overdo it: "The cold hard facts about remodeling is, the less you do, the better, because you'll never realize a 100 percent return," he says. "This has to be something that makes you happy and gives you value because the monetary value is never there."
RATE SEARCH: Want to pay for home improvements with a home equity loan or line of credit? Check out the rates at Bankrate.com right now!
Matej Kastelic/Getty Images
Avoid a money pit
Johnny D offers five tips to keep your remodel from turning into a money pit:
- Hammer out a project plan. "My biggest piece of advice is, have a tight plan, meaning both architectural plan as well as plan of attack."
- Draw up a contract that describes the full scope of the work. "I recommend using an American Institute of Architects contract. And make sure to include a 'time is of the essence' clause. That says if your contractor doesn't meet the scheduled, he pays a penalty."
- Never overpay your contractor. "The beauty of the AIA contract is, you pay the contractor based on the work completed. That protects you from overpaying and keeps the job on schedule."
- Never do your own electrical work. "Making a mistake can cause serious consequences."
- Leave the drywall work to the pros. "The pros can hang 20 boards a day per person and do it right. More importantly, when it comes to taping your drywall, please don't do it yourself. It takes real talent to make your drywall nice and smooth and ready for paint."