You Overimprove the House, You'll Lose

Greg and Sherry made the mistake of overimproving their two-bedroom home when their second child came along and it got too crowded. They loved the neighborhood, had lived there several years, and didn’t want to move. They reasoned, why not build an addition to the home for the room they needed. Interest rates were down, so they decided to refinance and do the add-on. A friendly mortgage lender agreed to refinance with enough extra to cover the $40,000 construction bid. The remodel almost doubled the size of the home and created enough room so that Greg and Sherry wouldn’t have to worry about moving anytime soon. It seemed to be a perfect solution. However, two years later Greg got a job offer in another city that was too good to ignore. They would have to sell their home, but when they talked to several realtors, they were shocked at the suggested sales prices. One agent, more forthright and with a little more patience, explained why her pricing was so low.
First, all the other homes on the street were two-bedroom cottages. There was nothing in the area as big as Greg and Sherry’s house. So the $35,000 remodel increased the price by about $12,000. Second, the lender had refinanced the home for about 120 percent of appraisal. On second mortgages and equity loans, the owner’s credit can weight as much as the appraisal.
Third, the homeowners didn’t take into consideration what the neighborhood values were. In fact, they pretty much ignored them and ended up with a house that had a mortgage $20,000 more than what it would sell for.
Fourth, they assumed they would live there forever and didn’t consider that employment and life changes can make the best plans go awry, especially in the technology job market.
Fifth, a home mortgaged for 20 percent over market value will take about 12 years to pay down to breakeven. Of course, the market can and will change several times in the next 12 years. But, you can’t count on the market heating up like in San Francisco or other high profile areas and bailing you out in months.
In the end, Greg and Sherry ended up renting the house and subsidizing it for about $150 a month. Hopefully, the rental market will
improve in the near future so they can at least break even or sell.