Would you spend $91,000 remodeling a $150,000 house?

[Myk Rian]

With 3 acres, make sure you can build an outbuilding.

[Wade Lippman]

How is that the reverse of the higher the risk, the greater the potential rewards?
They both read the same to me.

If I bet on a long shot horse and it comes in, I get a higher reward.

Because the track sets the odds to reward long shots. Life doesn't. You don't get a chance to make a lot of money by doing something really foolish that has little chance of success; no track to set the odds.
Just because putting $90k into a $150k house is risky, doesn't have anything at all to do with the potential reward.
The reward has to do with how shrewd he is about buying the house, how well he designs the improvements and how good a deal he gets with the contractors.
Putting $10M into the house would be extremely risky, yet there would be no chance of a reward.
Using a comparison to a horse race is silly.

(Of course I am, as I assume you are also, using the common definition of risk. If instead we use the technical definition (the expected variability of the return), there is no risk to putting $10M into the house; we know with certainty he will lose his money)

[Rich Riddle]

Only if the house was worth about $450,000 when completed, seriously. Why spend that kind of money on a house that has it at full market value? Too many houses on the market for less than value to spend all the agony involved in this process.

[Shawn Pixley]

It is difficult but we did it. I am lucky as my wife helps and is a full partner in the work. It takes tolerance, patience and a willingness to let things go. Washing dishes in the bathtub gets old fast. I will say that this is not for everyone. I worked full time and my wife took care of our son. A little work would get done daily. Big progress was achieved on the weekends. I was younger then and needed less sleep. People get testy when stressed.

We worked one room at a time. We had the electric panel replaced before we moved in. I set up a temporary kitchen in the basement. The bath was funtional and i needed only to paint and do a days worth of work to make it livable. I re-did the room for our son before they moved in. We'd move from room to room as I finished one room and started another. I was pretty well done in about 15 months. We did all the labor, but had to budget materials. Such is life when you are young.

[Rich Engelhardt]

Of course I am, as I assume you are also, using the common definition of risk

I literally have no clue what you're using.

To me, going $241,000.00 in debt to buy a $150,000.00 house - with the hope that:
- The contractors will all complete the work on time
- The final value of the house is at least $241,000.00
- There isn't something serious that surfaces once the property changes hands - I believe Freddie Mac is 100% "as is" with no disclosures.
- Something - anything - happens in the allotted time period that can divert funds away from the mortgage - injury, job loss, heck a rich relative could die and will the family farm to the OP and he'd have to come up with ~ $300,000.00 immediately (that happened to a good friend of mine and nearly financially destroyed him).
all spell risk to me.

OTOH - buying a house that has a market value of $241,000.00 for $241,000.00 spells lowered risk to me.

[Jim Matthews]

OTOH - buying a house that has a market value of $241,000.00 for $241,000.00 spells lowered risk to me.

D'accord avec vous.

I no longer consider any home I own, or will own an investment.
It's where I live. My wife and I saw 30% of the current home
"value" vanish just after we bought it, with no changes to
the tangible asset; no damage, no disrepair, no external changes in the neighborhood.

That "value" was based on something other than the house itself.

Unless your investment returns you something that you can't buy anywhere else,
it's time and money expended for delayed returns in utility.

As to whether it returns as equity at the point of sale (somewhere in the future)
it's no longer possible to predict. For one, I don't believe houses appreciate in value.

Remodeling is a stressful process, and rife with variables.

The contract should read, "Rough road ahead".

[David Weaver]

The land is an (sometimes decent, but sometimes just a tax burden) appreciating asset, the structure depreciating. I agree with your sentiment, Jim, and always have (before any crash) - investments are investments, buildings are buildings. When you live in a building, unless you move from house to house and only live in one long enough to do one of those paint and rental grade fix-up jobs, it's not an investment.

In this state, the taxing authorities make sure that's the case, too. You get to "own" it and "rent" it from the local school district at the same time.

[Brian Elfert]

With 3 acres, make sure you can build an outbuilding.

The city allows a garage up to 2,000 square feet with no height limit other than 45 feet. I made darn sure of that before moving forward. This particular city allows a 2,000 square foot garage on any size lot, even the older .4 acre lots. The city currently requires lots to be minimum 1 acre.

[Brian Elfert]

I literally have no clue what you're using.

To me, going $241,000.00 in debt to buy a $150,000.00 house - with the hope that:
- The contractors will all complete the work on time
- The final value of the house is at least $241,000.00
- There isn't something serious that surfaces once the property changes hands - I believe Freddie Mac is 100% "as is" with no disclosures.
- Something - anything - happens in the allotted time period that can divert funds away from the mortgage - injury, job loss, heck a rich relative could die and will the family farm to the OP and he'd have to come up with ~ $300,000.00 immediately (that happened to a good friend of mine and nearly financially destroyed him).
all spell risk to me.

OTOH - buying a house that has a market value of $241,000.00 for $241,000.00 spells lowered risk to me.

With that kind of attitude nobody would build a new house either because something could happen financially during the three months to a year it takes to build a new house. The really big national/regional builders might finance construction of the house themselves, but a lot of builders will require that a construction loan be taken out if the house is being built for you specifically.

I am going to talk to a builder about what it would cost to build the house I want on the lot they own. I don't think the lot is as nice as the other house, but it would be a completely new house for almost the same cost.

[Matt Day]

I'd try to get at least another GC bid, and make sure they are apples to apples. How do they know what materials to price so they are all the same? Did you give them a list of products you want?
Request they give you their sub quotes along with the bid so you can dig dealer.

[Rich Engelhardt]

With that kind of attitude nobody would build a new house either because something could happen financially during the three months to a year it takes to build a new house.

When we had our house built in 1986, the builder was on the hook for all the expenses right up until the very instant we signed the closing papers.
However - in a way you are somewhat correct & again, that's where risk and reward come in.
And - truth be told, very few people go the "build route" vs buying an existing house.
I'd never build again. We overlooked far too many details that you just don't think about until it's too late.

Yes - the builder could have come back at us for damages because we breeched the contract & we'd lose our down payment - but in all likelihood, nothing more.
The suppliers wouldn't come after us for the materials & the subs wouldn't come after us for wages. All that was on the builder.

OTOH - we could have gone a different route and hired a GC and not gone the "builder" route.
For that, we'd have more of a "custom" house instead of the "cookie cutter" design we have.

Risk/rewards - that's the way of things.

The really big national/regional builders might finance construction of the house themselves, but a lot of builders will require that a construction loan be taken out if the house is being built for you specifically.

That's something you in your position are closer to than I am.
It's been a lot of years since we built and it's been well over 30 years since I did business with builders

[Brian Elfert]

I had two contractors come out to bid the job. I got one budgetary bid back in two days and I haven't heard back from the other contractor at all yet. Things like flooring and tile for the bathroom are just allowances of so much per square yard or per square foot. It will be impossible to know for sure that the bids are identical material wise. The brand of furnace and air conditioner won't be the same most likely as each mechanical contractor has certain brands they sell. The contractors are only giving me budgetary numbers for now until I decide to move forward for sure or not. The one contractor said his detailed bid will probably come down a bit.

My last house I had built was custom for me. I had to get a construction loan and I think that technically I owned the house even during construction since I had bought the lot for cash before selecting a builder. There were allowances in the project even for lumber and such. If it took more lumber than planned I had to pay for it. Original cost was $179,000, and the final bill was right at $190,000 because I upgraded the flooring and the siding plus some other things. There were one or two screw-ups along the way the builder paid for.

I will ask this builder how things work if there are unforeseen issues. There is another builder I would prefer to work with, but he has no lot and this builder has a lot. (I like the builder who did my previous house, but he retired. I would like to use his brother in-law if I had a lot to build on.)

[David Weaver]

I had two contractors come out to bid the job. I got one budgetary bid back in two days and I haven't heard back from the other contractor at all yet. Things like flooring and tile for the bathroom are just allowances of so much per square yard or per square foot. It will be impossible to know for sure that the bids are identical material wise. The brand of furnace and air conditioner won't be the same most likely as each mechanical contractor has certain brands they sell. The contractors are only giving me budgetary numbers for now until I decide to move forward for sure or not. The one contractor said his detailed bid will probably come down a bit.

My last house I had built was custom for me. I had to get a construction loan and I think that technically I owned the house even during construction since I had bought the lot for cash before selecting a builder. There were allowances in the project even for lumber and such. If it took more lumber than planned I had to pay for it. Original cost was $179,000, and the final bill was right at $190,000 because I upgraded the flooring and the siding plus some other things. There were one or two screw-ups along the way the builder paid for.

I will ask this builder how things work if there are unforeseen issues. There is another builder I would prefer to work with, but he has no lot and this builder has a lot.

I think anything that you're selecting the grade, it takes a lot of discipline to stay within the budget. When I had a porch on my house finished, the contractor allowed $2k for HVAC just for that room. When we got down to the details, I wanted a split, and by the time electrical was done and I bought the split myself, as well as the line set, and paid someone to hook it up, it was $3300. I did the paint and floor, or the same would've happened with those, too. I had an urge to upgrade the windows, but didn't because I wanted to have some discipline (HVAC was a drop dead issue because the in-laws sleep in that room with it closed off to the rest of the house and it's not uncommon to have sub zero temps - the slide in units that I saw quit at 15 degrees).

I personally would rather let someone else make decisions that involve selecting low quality stuff than do it myself. It costs you the same or less as a buyer to do that in houses like you're looking at (which is the class my house is in, so I have the same issue with renovations - going premium every time as a default doesn't make money sense).

[Chris Padilla]

Interesting stuff, Brian. I think I would lean towards having the MINIMAL done (i.e. pay the contractor as little as possible) such that you are happy (enough) and the bank is happy (enough) to minimize your loan and then you can take your time to do the other things you want or need. In my own finances, cash flow is king. I want as much coming in monthly as possible and I've taken steps to increase that as much as possible over time. I've mostly done it with refinancing the house but also cashing in investments and paying off other loans and whatnot. The house is the only major cash hog right now (no car loan...and I only pay cash for new cars) and of course the regular bills and such. It stinks that you cannot contribute ANY sweat equity towards this venture. Could you at least HELP with the demo or something? It takes no skills to demo a house after all. Good luck and I hope things work out. Maybe the PERFECT house will suddenly pop up for you as time winds down.

[Brian Elfert]

I got the second bid finally. It is quite a bit more than the other bid. I am leaning towards moving forward with this project. I looked at a lot for a new house, but the builder was proposing a really cheap house. By the time I added in all the stuff I would want to upgrade the price goes up by a good $15,000 and I still don't really like the lot that much. I am going to potentially look at one more house before I decide for sure.

Part of the reason for moving is to improve my finances. I'll save $200 a month just on property taxes. The only thing on my project list I could really do myself would be the bathroom. I can't install the heating/cooling system and it would be hard for me to replace the windows, doors, and siding. I might see about dropping the bathroom from the project, but the house might not appraise for enough without it. The basement bathroom is totally gross.

I plan to do the demo myself as I would be allowed to do that.