This post continues our budget series. For a recap, you can see $257,000: The Rundown (Budget Part 1) and 257,000: Cost Breakdown (Part 2), and why we decided to be transparent with our remodeling costs in this post: Blogger’s Block.
Now onto to the next question you may be wondering: How did you pay for the project and why did it spiral out of control? Let this entry serve as a warning to future remodelers out there. Also, the saying that remodeling budgets usually cost twice as much as you’d expected is uncannily true. In our case, probably more like 3-4 times as much!
Anyway, let’s start at the beginning. We were relatively young first-time home owners at age 23. Our first home was located in the Portland suburb of Hillsboro. We purchased a 1500-sq.-foot, 3-bedroom, 2 1/2 bath house built in 2001 for $180,000.00. It was on a corner lot on a dead-end street in a great neighborhood. One problem was that it was at least a 30-minute drive into downtown Portland.
Although we’ve always made a modest income working in the web industry, in 2006, we negotiated contract that essentially doubled our income. That got us to thinking about what we should do to move forward.
It seemed logical at the time to look into housing in Portland proper. The housing market was starting to soften and we were excited to find a house with some historical character. Looking back, what we should’ve done is stayed put and paid off our existing mortgage. If we had done so, we could’ve had our mortgage paid off in a couple of years and moved to Portland with a huge down payment at the lowest interest rate environment in decades with a HUGE down payment. Hindsight is 20/20 so this part does make us a little bitter.
We went looking for a house before we listed our house. We found a couple of houses we put offers on that ended up falling through for one reason or another. One was really expensive and needed too much work (or what we thought was too much work at the time) and for a lot of sketchy reasons I won’t rehash, we walked away. Another was priced high but was perfect for us. Needed a bit of work, but nothing major. We lost to another offer that came in at the same time.
After two failed attempts and looking for about 6 months, we were definitely frustrated. We thought about going another direction: finding a cheaper fixer and possibly flip it. Now “cheaper” in the better, closer-in neighborhoods in Portland at the time was still around $300,000.
Soon after we found the Bungalowcious house. Problem was that we came in too late as it had another accepted offer. But within a week, that offer was rescinded. We probably should’ve took that as a sign that OMG this house needed TOO MUCH WORK, but I digress.
The purchase price was $329,000.00. We could’ve walked away after the inspection and probably should’ve. It was 30 pages long with photos of things that needed to be fixed. Many were small things and things that every 90+ year house would need (electrical, plumbing, etc.) We brought in a contractor to give some general estimates on some of the bigger problems like the old foundation.
We decided we could probably do a lot ourselves but negotiated the closing costs into the purchase price to make up for some of the needed repairs. We hoped to get substantial funds from the sale of our last house, so we hoped that would mostly cover what we needed initially and we could cash flow the rest.
A side note, the inspection didn’t go into that we needed a new roof, which wasn’t apparent until later in our project and they ripped part of it up for the dormer. That was a $7000.00 unexpected expense. Also we did a sewer scope that came back clear, but the city later FORCED us to replace it during the remodel for an unexpected cost of $4500.00. I think if we would’ve known those things along with our plans to add a dormer and finish the attic and basement costs, we may have walked away. Again, hindsight is 20/20.
Through creative financing (see: stupid), we were able to buy the house before selling our other house. Now, we were very lucky that this didn’t blow up in our face. We hoped we would have a couple of months with both houses so that we could do some of the work before moving in. Instead, since our house was priced right with a good realtor, in great shape and staged well (I watched too much HGTV at the time), we ended up closing on one house within a few of weeks of closing on the other.
Here’s how the sale and the purchase shook out numbers wise:
|03/09/2007||Proceeds from sale||48,376.00|
|03/29/2007||Down payment on Bungalowcious House||28,085.27|
|Remaining proceeds to put towards remodel||20,290.73|
|02/20/2007||Escrow (out of pocket)||5,000.00|
|03/09/2007||Down payment from proceeds of Hillsboro house sale||28,085.27|
|02/22/2007||Appraisal fee (out of pocket)||375.00|
|02/26/2007||Sewer scope (out of pocket)||200.00|
|First Mortgage (30-year-fixed 6.375%)||263,200.00|
|Second Mortgage (Interest Only ARM started at 8.75%)||32,900.00|
As you can see, we ended up having to put down 10%, which depleted the proceeds we hoped to have on hand to start the remodel. We should’ve considered that we would lose cash on hand to start fixing things in order to do the down payment, but we were stupid and figured we’d just cash that out when we started the dormer phase of the remodel.
We moved in late March into a empty money pit that didn’t look quite as cute and quaint as when it was stuffed with the previous owner’s “Grandma’s House” furnishings. It also smelled old and funny. This was our first real wake up call that we may be over our heads.
There was also no dishwasher, a tiny fridge, and no a dryer hook-up in the basement because the previous owner always hung clothes up to dry. So it was back to the laundromat for the near future. Buyers remorse hit hard.
We weren’t sure where to begin. We had a vague idea of priorities but no sense of what order we should do things. We started haphazardly getting bids on the big things we knew would have to be done: plumbing, electrical, etc. The bids were coming in as vaguely ballpark as we had no blueprints for them to reference as to a final state, just our vague ideas. After a couple of months, we settled on getting a designer to help us draw up some real plans. The cost? $3,700.00.
The plans took a couple of months to flesh out and then we started interviewing contractors to get some real numbers. We started out with four general contractors and slowly narrowed down to one. Even after narrowing down to one, we had to get really specific on all the fixtures and finishes to get a close-to-final price.
We struggled a lot at the fact that with a G.C. it was still going to be in-excess of $140,000.00 to get both the major structural work done as well as the finishing of 3 baths, kitchen, attic master and basement. Coming from small town Minnesota with nice houses costing $140K, it seemed crazy to spend $140K on top of a $300K mortgage!
With a final bid price astronomically higher than cash on hand, even after pulling our down payment back out, we knew in order to start soon we had to find a construction loan in an ever-increasingly tight lending market. Wells Fargo was still doing construction financing, but the permanent loan closing costs were significantly higher than a traditional mortgage. Not knowing any better at the time, we went for it and started that loan late December 2007, with hopes to start construction in January 2008.
In addition to the construction loan, we tackled some small projects that we figured would have to be done at some point, but didn’t need to wait until we started the big remodel. So from March-December 2007 we spent an additional $28,930.20 out of pocket – $6,500.00 of which was a deposit to our general contractor to begin in January. The rest was spent on projects like the chimney removal, new furnace/central air, electric panel upgrade, paint stripping, and the demolition of the basement, attic, staircases and kitchen prior to the official remodel start. We also purchased a few fixtures in anticipation for the remodel to begin.
|Last Month Construction Loan Balance||435,008.83|
|03/09/2007||Closing Costs (out of pocket)||(3,981.34)|
|First Mortgage (30-year-fixed 6.625%)||372,000.00|
|Second Mortgage (Interest Only ARM started at 6.75%)||69,750.00|
During construction, we also had a ton of unexpected expenses that required cash out of pocket as mentioned above: the new roof, new sewer, electrical changes required by the city, etc. That and the fact that we hadn’t put allowances for appliances, flooring and other fixtures into our construction loan, wanting to purchase those out of pocket. After all that was said and done, in 2008 we spent an additional $57,442.23 out of pocket, not including the amount financed.
Upon closing on our permanent mortgage after the completion of our construction loan in August 2008, our payments jumped an additional $920.00/month. Ouch! What a way to celebrate a 2/3 completed remodel. Note: We still had the main floor to complete (a.k.a. “phase 2”: living room, dining room, hall and 2 bedrooms that we lived in while the rest of the house was torn apart.) We took the rest of 2008 off to recover from the remodelers’-high hangover.
In January 2009, we found Dave Ramsey, a little over a year too late for all our crazy spending and playing kissy-face with Wells Fargo (YUCK!). We decided to get real about our overspending and pay off all our debt using his Baby Steps.
This also meant that we had to follow a tight zero-based budget and keep the Phase 2 remodeling expenses as low as possible, only paying with cash. NO MORE CREDIT CARDS! This was a really scary decision, but so worth it looking back!
We tried to do as much as we could ourselves, but we knew our shortcomings, so we got bids on things as well. With the economic downturn, a lot of contractors were pounding the pavement looking for extra jobs. We were able to get some really fabulous deals during this time from some great guys wanting work. We hired out the remaining wood stripping ($2,880), trim/door dipping ($2,036) drywall ($2,630) and exterior trim painting ($1,700). We kept busy doing trim and plaster demo, refinishing the porch floor and all original windows. Having boards over your windows for months is not fun by the way. :)
So after all that, along with materials, we spent $13,482.22 out of pocket in 2009. A far cry from our $60k just a year before. We were able to free a lot of that income up to pay off other debts (credit cards and a large car note).
We also attempted to refinance in 2009 as interest rates had plummeted 2% in only 6 months. Unfortunately because we had a second loan with Wells Fargo, we felt pressured to stick with them for “ease in subordinating the second mortgage” and rolling some into the first mortgage.
We were lucky that our appraisal came back high enough even with part of the house unfinished. Finally after 6 months(wtf!!!!) of Wells Fargo incompetence, we finally closed on a refinance saving 1.75%. Even with more closing costs, this turned out to be worth it. We cut $370.00 off our monthly payment, and would recoup those costs in 21 months (May 2011).
|08/17/2009||Beginning Balance (First Mortgage)||369,296.33|
|08/17/2009||Second Mortgage Pay Down, Fees||44,093.90|
|08/17/2009||Closing Costs (out of pocket)||(5,007.63)|
|New First Mortgage (30-year-fixed at 4.875%)||416,000.00|
|08/17/2009||Current Second Mortgage||69,750.00|
|03/09/2007||Pay Down from First Mortgage||(43,750.00)|
|New Second Mortgage (Interest Only ARM started at 5%)||26,000.00|
|Final Loan Total||442,000.00|
We still weren’t done yet, though. In 2010, our income took about a 15% hit, so we were even more intense on being frugal about the remainder of the work. The only major expense we hired out was refinishing our hardwood floors ($1,998) and some necessary additional lighting ($600). We restored all the original doors, trim and built-ins: sanding, staining and varnishing up a storm for months. We painted and did the million little projects that add up. Year end total out of pocket: $9,046.51. And with that, in October 2010, our interior remodel was FINALLY DONE!
|2007||Remodeling Out of Pocket||(28,930.20)|
|2008||Remodeling Out of Pocket||(57,422.23)|
|2009||Remodeling Out of Pocket||(13,482.22)|
|2009||Mortgage Principal Repayment||(2,058.54)|
|2010||Remodeling Out of Pocket||(9,046.51)|
|2010||Mortgage Principal Repayment||(7,379.75)|
|2011||Mortgage Principal Repayment||(30,447.02)|
|Debt Repayment to date (June 2011)||(147,627.63)|
|Remodel Costs Remaining
(in First Mortgage Total $404,253.50)
You may notice that our 2011 Mortgage Principal Repayment total is huge compared to previous years. That’s because now that the rest of our debt is paid off, we were able to attack our second mortgage of $26,000.00 and completely pay it off this month! Woohoo! Our only remaining debt is our First Mortgage, which is daunting, but not impossible as long as we keep plugging away at it on Dave Ramsey’s plan!
Looking back, we now see that with our fabulous income, with a little bit of patience, we could’ve cash flowed the whole project $50,000-$60,000 a year at a time, and still made significant progress. Probably still finishing in 2010 or this year at latest, but with NO ADDITIONAL MORTGAGE DEBT! And saved a ton in closing costs and no interest.
We were extremely fortunate to have steady jobs during this long project as well. It could’ve turned bad really fast, had that not been the case. Especially when we had the rest of our debt on top of our mortgage and the sharp decline in housing prices. Any blip in our income situation would’ve made it impossible to pay the crazy mortgage payment we got ourselves into.
Also in a worst case scenario, if we had to attempt to sell a half-gutted house, we may have been forced like so many others into a short-sale or foreclosure situation. Only by the grace of God were we saved from our own stupidity. The lesson: Don’t be like the pre-2007 version of us! At the risk of sounding preachy, debt free is the way to be!