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© Copyright 2012 Rand Soellner
There is at least one DIY show on TV that has the same theme, week after week, and it is the only truly honest show of its kind. The theme is: a nice young couple buy a run-down house and they cross their arms, adopt a tough expression and put their backs together and pose for the camera at the beginning of their endeavor. Jane and John said: “We’re going to spend $5,000 and add 2 bedrooms and a new fireplace and totally renovate and expand the kitchen and also add a new master bath, and we’ll be done in 3 weeks. And we will sell the renovated house 24 hours later for $100,000 profit!”
Those of us with any experience in architecture, construction and real estate know what is coming.
Jane & John Jones throw on their old CalTech sweatshirts and bluejeans and neat white Nike running shoes and commence working and shortly discover that construction is hard, sweaty, dirty work. And expensive. They soon realize how much they do Not know about construction, including roofing, plumbing, electrical, carpentry, cabinetry, tile, heavy framing, installing walls, doors, windows, and a host of other items. So, Jane & John end up hiring “Sid the Contractor” and then Sid the contractor does the tasks requested, but he actually needs to be paid! So there goes several thousand more dollars out of John and Jane’s meager project budget, and while the real contractors are tearing things apart, they discover severe termite damage, foundation cracks, damaged and improper plumbing, mold, rotten roofing and more problems.
Jane & John got angry at the contractor, but he simply shrugged his shoulders and told them: Hey, neither you nor I knew anything about what was under the surface of the walls, roofs and foundations. You didnt pay me to conduct an analysis, you just said: Get to work, and I did exactly what you asked me to do. The fact that these problems were hiding here to bite you in the butt have nothing to do with me. This is your house. You own it; you are fixing it; thats on you.
These are real-world eventualities that require planning and budgeting for unseen circumstances and most naïve lay people don’t plan on such things, as a matter of fact, most citizens like Jane & John actually think that they are going to get the least expensive labor and material prices in the history of the Universe just for their project because they are special and people will want to give them super deals because they are tough negotiators.
Well, the reality is that even though many contractors have not been terribly busy lately, when Sid the contractor do work they do need to make a profit, so that they can feed their families and their employees and subcontractors, so, no, most people will not be experiencing huge discounts, nor will contractors be eating existing problems hiding there in existing homes, fixing them for free, just so people like Jane & John will like them. Like-Schmike, said Sid the Contractor, I need to make some money so I can pay my own bills and bring home a pizza to my wife and kids tonight. Contractors these days will give you reasonable prices, yes, but not for free and not at a rate that makes the builder lose money. He simply cannot afford to. Every job has to make money or he and his people do not eat. They have no magic slush fund that will absorb the mistakes and oversights of inexperienced DIYers like John & Jane.
Well, needless to say, the nice young couple doesn’t look so nice anymore and in 6 months instead of 3 weeks, their renovation project drags to a rough close, with a several unfinished edges. Instead of spending $5,000 they have spent $80,000. They believe that they can simply tack on that extra money to the asking price.
The real estate brokers checking out the improved house advise that they sell the house for a lower price than Jane & John want to recoup for their now inflated investment. “Oh, but we gotta have $250,000!” shouted Jane, we have personal goals! And she believes that the louder she shouts this, the more it will happen.
The property is put up for sale, as a FSBO , with Jane & John thinking that they can sell it themselves and save the realtor’s fee. Hah! How smart! Why doesn’t everyone do it this way? And we will get the extra money we need!, said Jane, Hey, why don’t we ask even more? Thinking that she can simply ask for whatever she wants and she will get it. That will give us some extra profit so that we can buy two more future fixer-uppers! Knowing that they are the smartest flippers in the World, Jane & John go out for a nice, big, expensive steak and lobster dinner at the local Red Lobster and leave a $40 tip. Hey, said John, we can afford it! Were selling a house tomorrow! On the way home, they pull through the local BMW dealership and begin picking out Beemers of their favorite colors. John looks at the 900 series, knowing that he will be a great flipper success story and that he needs the proper image in which to swagger around from flip to flip project, barking orders at armies of Sids.
On open house day, Jane & John are holding cups of Starbuck’s carmel latte cha-chas and have big smiles, welcoming in about 10 to 20 people to see their handiwork. Jane & John tingle with excitement, already spending their profits in their minds on jewelry, new cars , and of course, on their next fixer-upper a few miles away. The interested crowd wanders through the renovated house, thinking at first, that things look much improved. “Oooo, wood flooring,” they gush, as they walk through the living room. John smirks and whispers to Jane Actually its Pergo They clink their Styrofoam cups together and take healthy swigs, washing down their self-satisfaction.
Then the would-be buyers notice that the master shower has been placed outside of the master suite and down the hall, into an old closet. Jane & John had complained that they didn’t want to spend money on an architect to help them organize things better, because, “no one would notice.” The crowd of onlookers scowl at this closet shower, and also notice that there are no faucet handles on the 2nd bathroom tub yet.
And the kitchen counters were changed out with a plastic material, that Jane personally preferred, although their renovated house is located in a community known for granite as being the norm for nicer residential properties, as counseled by the realtor who sold them this house. But Jane & John felt that their own personal tastes would guide them well; after all, they know what people like: exactly what They like! Of course!
And Jane & John decided on keeping a non-load-bearing partition that separated the dining room on the entry side of the house, away from the Kitchen and away from the living room. There is no “great room”, perhaps not even a “good” room, said Sally, one of the would-be buyers to her friend, Amanda. They and the other house shoppers file out, and in only about 15 minutes.
No offers are made.
The sound of crickets is heard.
Jane & John pitch their leftover Starbuck lattes into a trashcan and adopt grim expressions. This did not go the way they had imagined
Weeks and then months drag by. Mortgage payments are made each month, further diminishing hoped-for profits. No one is even looking at Jane and Johns renovated house, and now the home has been on the market for 4 weeks. 6 weeks. 12 weeks. 36 weeks.
Finally, there is an offer! There was a message from a Betty & Joe, on Jane & Johns answering machine asking them to call to hear their offer. Hallelujah! shouted John, jabbing the air with karate punches, eager to hear how much money they were going to make on their first shrewd flip. He grabbed Jane around her waist and pulled her up off her feet, both of them smiling widely.
Jane hurriedly punched in the phone number for the buyers. She asked for Betty & Joe. It was Joe on the phone. Joe quickly informed Jane that their offer was for $25,000 Less than Jane & John had Originally paid for the house, before they dumped their inexpertise and questionable choices into it. Janes smile slid down her face. Jane quickly whispered the low offer amount to John, while covering the receiver. John shook his head violently. In a shaking voice, Jane told Joe that his offer was an insult and that no, they would not accept that, and hung up on him. John stared down at the floor.
4 weeks later, Jane & John panicked and called Joe & Betty, the other couple who had made the lowball offer. Betty answered. John hastily said that they had been thinking about their offer and that they will accept that, just to stop the financial bleeding, but that the buyers will have to pay them extra for their mortgage payments they have had to make while they waited for an offer.
Betty sharply reminded John how rude his wife had been to her husband and then Betty hung up on John. John and Jane, tears in their eyes, wondered what to do.
Suddenly their phone rang. It was Joe. Outraged at the audacity of Jane & Johns suggestion regarding paying for their back mortgage payments, Joe declared that they would buy Jane & Johns house, but that their offer was now even lower than before: $40,000 less than Jane & John had paid for their unique fixer-upper, and nothing else, and that the offer was good for 60 minutes or they will walk, this time, for good. With no real estate broker to insulate the hot tempers between buyer and seller, or to negotiate in good faith, Jane and John lost a bundle.
Jane & John shed more tears and sold their house at a huge loss, disillusioned that everybody in the World didn’t love their choice of salmon-colored house paint with which John had coated the exterior of the house, as well as her floral foil wallpaper with which Jane had wrapped the interior. Also, the would-be buyers did not appreciate that Jane & John hadn’t bothered to clean up the front yard .
WE DO NOT WANT THE ABOVE TO HAPPEN TO YOU! We want your story to be a happen one.
Okay: what can we learn from this tale of woe and renovations?
1. ENGAGE A REAL ESTATE BROKER: hire a real estate broker first. They are worth their weight in gold. Follow their advice and get your property listed immediately when it is ready, for a reasonable price so that it will move quickly. A real estate broker lists your property on the MLS and that is the most powerful tool that they have. If you do not have your property listed with a broker, it will Not be on the MLS and you may never find a buyer. Other brokers often sell each other’s listings gladly, because the buyers can come from any of them. You widen your net, rather than shrinking it. Also, you do Not want to directly communicate buyer-to-seller! This is an emotional and financially-charged situation, with tens of thousands, if not hundreds of thousands of dollars on the table, and cooler heads prevail. Only your broker should directly negotiate with the other broker, fielding the offers and counter offers. And listen to your real estate brokers advice concerning a realistic price for a renovated house BEFORE you invest in renovating or even buying the fixer-upper. If you want to sell swiftly, your broker may very well recommend that you sell the renovated home for slightly less than other actual Comparable actual recent sales in that neighborhood. They will conduct a CMA for you, if you ask, and this should guide you in what might be realistic in terms of an actual sales price. Do NOT let your enthusiasm for your eagerness to be a success cloud your judgment on the first real estate deal. And do Not over-invest in things that you might happen to prefer but will not bring you another cent.
2. HAVE THE “FIXER-UPPER” HOME INSPECTED BY A STATE-LICENSED HOME INSPECTOR: before you buy the wonderful home that is going to make you so much money, make sure that it is not a money-trap. A professional home inspector will take several hours to crawl all around this house, taking notes, checking thousands of points on checklists of all sorts of possible issues, taking moisture readings, taking laser temperatures of heating and air-conditioning grilles and vents, checking the operation of plumbing and electrical items, take digital photos and provide you with a detailed annotated report, often over 35+ pages long, describing their findings and informing you of these situations before you buy.
3. HIRE A REAL, LICENSED ARCHITECT: if you are doing anything substantial, engage an architect. You would be amazed and how much help they can be, even for minimally budgeted projects. They can help you identify non-load bearing walls and other elements that can be changed out easily or not and direct your energies accordingly. Also, architects have build-in creativity to arrive at creative solutions that could not only look great, but help save you money. They will also guide you in the right direction to help you make improvements that sell. Only a licensed, real architect is qualified to help you understand all of your options.
4. HIRE A LICENSED CONTRACTOR: not Bob and 2 guys in a pickup truck. You could be left holding the bag unless you have your improvements constructed properly and in compliance with building codes.
5. HAVE REALISTIC BUDGETS, SCOPE OF IMPROVEMENTS, TIME SCHEDULE AND PROFIT MARGINS: use the 4 people above as your brain trust to help you obtain realistic information upon which to base sound judgments. Do not begin your project until you have firm numbers for everything, with specific time schedules. Create an Excel spreadsheet and live by it from Day 1, to monitor & manage your costs and time.
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