Financing and Budgeting

The Bad News

First the bad news: There are no no two ways about it, renovating a house is expensive in both time and money. There are a huge number of variables in determining how much a specific project will cost in the end. It is therefore impossible to create a "rule of thumb" for cost estimating without individually inspecting the specific property.

Depending on the following conditions, gut renovations generally cost anywhere between $40 per square foot and $140 per square foot. The big variables are, in no particular order:

• General Condition - With some exceptions to the rule, the worse physical condition the property is in, the more it will cost to bring it up to a finished state.
  
• Sweat Equity – Hiring a contractor is more expensive than doing work yourself.
  
• Finish Level – Granite counters are more expensive than laminate. Tile is more expensive than vinyl flooring.
  
• Kitchens and Bathrooms – These are the most expensive spaces per square foot.
  
• Structural – Fire and water damaged structures are relatively expensive to repair.
  
• Masonry – Rebuilding walls and tuckpointing are relatively expensive.
  
• Siding - Worn vinyl siding is difficult to repair. Deteriorated siding should be replaced with like material. The more extensive the damage the more it will cost. At some point it makes sense to simply reside the whole structure.
  
• Custom Restoration – Historic features like carved wood handrails and plaster crown molding are difficult and expensive to restore or replicate.

The Good News

Here’s the good news: there are plenty of people out there who want to help you finance your project if you have decent to good credit. Banks continually improve their loan products to take advantage of the purchase-rehab market.

There are several banks and lending institutions in Des Moines that have renovation loan products. Neighborhood Finance Corporation targets certain geographic areas with forgivable repair loans and down payment assistance. These forgivable loans are not income tested - anyone who purchases a house in an eligible area may qualify.

A so-called "purchase-rehab" loan (a 203k loan is one example) may help bridge the gap between what a house is worth before renovation and what it is expected to be worth when the work is complete. The loan amount is based on the estimated after-improved value of the property. Money for renovation is put in an escrow account and released to contractors as they complete work. Some purchase-renovate loans require additional paperwork throughout the renovation process. Make sure you understand the inspection, paperwork, escrow, and payout requirements!

The Finer Points

Interest rates are typically higher on all types of construction loans. Renovators usually finance the renovation with a purchase-renovate loan or a construction loan and then refinance into a fixed or ARM with a lower interest rate. Often certain components of the renovation (a third floor for example) can be put off until after refinancing - the equity (hopefully) developed through the renovation can be leveraged to finance additional work.

If your property is located within a designated historic district, your project may qualify for historic tax credits. The tax credit application is certainly not rocket science, but it does require significant effort and may prove frustrating for people who are unfamiliar with the process. There are people who specialize in preparation of historic tax credit applications for a fee. Your architect or design professional may also provide this service.

Budgeting

Many lenders will require a professionally prepared set of architectural drawings as part of the loan-making process. These drawings help the lender establish the estimated after-improved value of the property and help the owner get comparable bids from contractors. See the section about Design Professionals for additional information.

You should by this time, through the lending qualification process, have a good understanding of your own finances and how much money you will have available to you for the renovation project. Some loan products will require the participation of an inspector to assess the building and your plans to put together a preliminary general budget.

If you are managing the project yourself (serving as your own general contractor) and getting a conventional construction loan, you will need to prepare a much more detailed budget. It helps to have a contractor available to bounce numbers off of. A design professional may also have some advice for this stage. The RenovateDSM construction estimate worksheet can assist you in tracking your budget numbers and helping to make sure you don't miss any major categories.

Make sure you include a healthy contingency number between 10 and 20 percent depending on the scope of the project and you own construction budgeting experience.