May 12, 2022
If you are interested in an FHA 203(k) Rehabilitation Loan to buy and renovate a home or want to use the refinance version of the FHA 203(k) Rehab Loan, there are some things you should know before committing to a renovation project.
That’s especially important for those who want to refinance their existing mortgage into an FHA 203(k) and use the loan funds to improve the home they already own.
Why? Because it’s easy to get the wrong idea about how much value certain renovations might add to your property. For example, some might believe that adding a pool or hot tub will increase the value of their property.
Never mind that FHA 203(k) Rehab loans don’t permit such luxury items, it’s the misconception that’s most important here.
Why is that particular addition so worthless? According to some sources an in-ground pool costs between $30 and $50K. But the value-added amounts to roughly seven percent of that amount. If you wanted to add a hot tub to please yourself, those numbers won’t matter.
But if your goal is specifically to add value to the property for eventual resale, the pool or hot tub is a bad idea even if you could use FHA loan funds to have it installed.
In general, it’s a bad idea to expect to recoup the full cost of any renovation project. According to some sources, replacing your garage door comes about as close to the break-even point as it gets. You won’t get to 100% but could come within a few percentage points of doing so.
Another remodeling project that recoups the cost in the 90% range is replacing your existing siding with manufactured stone veneer.
The Remodeling Cost Vs. Value Report of 2022 at www.costvsvalue.com includes those numbers and adds more. How much more? A primary suite addition recoups less than half the expense, and an upscale bathroom addition only recoups a little more than half the investment.
So the real issue is whether or not you are selecting renovations to improve your enjoyment of the home or whether you want to up the value of the property ahead of putting your house on the market.
It’s smart to know what projects could add more value to the home versus which ones turn into money pits because the return on investment is so low. In some cases, it may be best to focus on upgrades that improve the efficiency of the home, or those that fix a noticeable issue with the property.
You don’t have to replace perfectly good siding that’s not at the end of its usable life to get more value out of the home. Unless, of course, there’s an issue with the siding that needs addressing to fix the home’s curb appeal.
It never hurts to consult with a real estate agent, loan officer, or contractor on these issues to learn what current market trends might affect your choices. Ask a lot of questions before you make up your mind about which project might be best for your home.