The Friday Gathering – Need some advice edition
By glblguy
Photo by:Point-Shoot-Edit
My wife and I were having a discussion last night about our house. As many of you know, we’ve been casually looking around for another home. We’re looking to move out in the country in a house with some land. I say we’ve been casually looking, as we can’t really sell our house right now. We have a whole list of things that need to be done before its ready to sell: repainting, repairing some interior molding, new carpet, and some other minor things. The big problem is the major items on the outside.
Our chimney is made of wood and hard board siding. The chimney must have a leak, as over the past year or two it has slowly rotted. It looks fine from a distance, but upon close inspection the trim and siding is rotting away. I am honestly surprised it hasn’t just fallen over yet. We also have quit a bit of trim on the outside that needs replaced and the whole house need fresh paint.
All of this together, I am guessing is going to run about $10,000 – $12,000 give or take. Just getting the wood replaced and the house painted is a good 5-6 thousand.
We are trying to decide how to handle this situation and have basically two options that we are aware of: 1) Save up the money and repair the house, which means we’ll have to stay here for a while or 2) Take out a home equity line and use that money to repair the house and then pay it off once we sell (We have about $50,000 equity in our home).
I really prefer option #1, but we would really like to move before my oldest son starts high school in 2 years. Option 2 scares me to death as it requires taking out a loan. Now arguably, it’s debt, but debt against positive equity on our home. Of course to me, that just sounds like I am possibly trying to rationalize going into debt which makes me nervous.
My wife and I discussed this last night for a while. I told her about the two options and she asked: “What would your readers think and what would you tell them to do?” Great question huh? I replied: “You know, I don’t know what I would tell them to do as real estate isn’t really my strong point. But what I can do is ask them.” So, I’m asking: What would you do in this scenario?
After writing this, I have thought of a possible 3rd option. I am thinking my homeowners insurance might cover the cost of the chimney. Any insurance gurus out there know?
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June 27th, 2008 at 7:38 am
The first thing I’d do is get an appraisal from a trusted real estate agent (for instance, if you have a friend)–could you really sell the house for what you think you have in your mortgage + equity, if you did the repairs and updates? If so, I’d take out the HEL and get the work done. Oh, but before getting the loan, I’d get quotes on the work–no sense getting $10000 and find out it will cost 30000. Or doing one job and finding out the rest will cost more than you want to do. And maybe also get an inspector in to make sure there aren’t things you are missing. (Our inspector ran about $400 when we were house buying, incl. radon testing. We’ve done 3 inspections and it was always worth it.)
Why would insurance cover your chimney? It’s just fallen into disrepair. Insurance doesn’t cover replacing your roof or worn floor boards. But really the best way to find out is to call your insurance agent and ask her/him.
June 27th, 2008 at 7:50 am
Good luck with your decision! I want to remind you that in your previous post, you said you were “allergic to debt.”
Also, here’s a post you wrote about how there is no such thing as good debt: http://www.gatherlittlebylittle.com/2007/08/22/good-debt-there-is-no-such-thing/
So, if I came to you with the question of whether I should take out a HELOC for these repairs, I’m betting you’d tell me to find another way.
Ultimately, you know what’s best for your family, and if borrowing against your home is the best way to do that, well then, go for it.
My best advice is to get a ton of estimates on the repairs and also appraisals on your home.
Good luck!
June 27th, 2008 at 8:03 am
This might go against your gut but I say it is an easy decision … get the home equity loan or line of credit and make the repairs sooner rather than later.
I know Gibble has a fear of debt but now that you rule your finances rather than them ruling you, you need to at least consider debt as a tool.
Here is my logic:
1) Your home (and car) need to be maintained on a timely basis. Delaying certain repairs such as rotting wood means the problem will grow and be even more expensive to repair later.
2) You know you will have to spend this money anyway. You can’t sell your house without making the repairs (or discounting the price by even more than the cost of the repairs). This is not a luxury purchase.
3) Home equity interest rates are reasonably low and when the money is used to improve your home then the interest is also tax deductible.
4) In today’s economy and job market uncertainty (layoffs are a real concern) it might benefit some to establish a HELOC now. If you don’t need it now and have a job then getting one is easy. If you do need it and don’t have a job then getting it is next to impossible. I know it shouldn’t be considered an emergency fund but if it is free to open the line of credit now then it allows you to be more aggressive paying down your first mortgage since you know you can get it back if really needed. That advise only applies to people with financial discipline. I’m actually applying for a new larger replacement HELOC today since I have much equity available today than I did 5 years ago when I opened my existing account.
5) The main reason I recommend you make the repairs now even if you have to use debt is so you will be in the position to seize future opportunities. These are tough times and some people (good people) who didn’t build a solid finacial foundation are being forced to sell at a discount. This includes foreclosures, job loses, divorces (stressful times), a buyers market, etc. All of these reasons are unfortunate and I take no joy in them but opportunities will exist. If you don’t make the repairs now then you will not even have the option to act but if you do then you will have the choice.
I’ll leave it to others to point out the reasons to go the safer savings route.
June 27th, 2008 at 8:49 am
Well, actually, I have a pretty good idea of what you’d say, since you gave me some advice about my friends and a fence a while back.
You told me that Dave Ramsey said they should live with it until they could cough up the cash, and that Dave Ramsey lived with holes in his roof until he could afford to fix the roof. :)
That said, I don’t own my home, and I have no idea what I’d do in that situation. I honestly think it’s a tough call. But I really do think you’d probably tell your readers not to take on debt.
June 27th, 2008 at 9:15 am
Isn’t so hard to make these decisions when it’s your own home? I think before you look at the financing options you need to get some concrete numbers. My granny always follows a 3 estimates rule and we do the same now. This has served us well. Others have mentioned hard economic times and that is also effecting the cost of repairs like what you’ll need (generally bringing them down because these folks need to pay their bills too). So, I guess I suggest get solid estimates so you know what you’re dealing with. Also, there may be other problems you don’t see. Is that moisture getting inside the house and causing an unseen mold problem? Is it effecting the foundation? I hope not, but a professional can and probably should look at these things for you.
June 27th, 2008 at 9:30 am
The first thing you need to do is get some real estimates. DON’T guess!! If your chimney is leaking than there could be other damage underneath it and maybe other areas in that part of the roof. Rain has a way of finding the smallest holes and doing a lot of damage so get some experts to look at it and get some real estimates. Preferably 3 or 4 of them and make sure you can find out how good or bad they are, through references or whatever else you can dream up.
I understand where you are coming from in being afraid of taking on a loan to fix this. Think about it like this, if you have someone look at it now and the price is fairly reasonable, how would you feel if you saved for that over a year or 2 and found out there was slow water damage and now it’ll cost twice as much as what you saved?
How’s that for a run on sentence? I hope you get my point, despite my lack of writing skills. :)
June 27th, 2008 at 9:38 am
Forgot to mention, unless the damage to the chimney was caused by a storm or some other “incident” it may not be covered by your homeowners insurance. But, different states have different rules and different insurance policies have different coverages so it might be worth a call to your insurance company.
June 27th, 2008 at 9:53 am
I think that if you have FIRM plans to sell, the HELOC makes some sense. Only if you have firm plans.
I’m looking at it this way. Hypothetically, let’s say you don’t fix the chimney and the home ends up getting sold as a fixer-upper. You’ll probably get less money on the sale than you put into the house, right? Because you’re selling for less so they’ll have to do the work.
If you take the HELOC out and do it yourself, then you’ll make less money on the sale as well. But you’ll be selling the house for more…hopefully enough to make up the cost of the chimney. Perhaps even more than that since it won’t be perceived as a “fixer upper.
In this case, it’s not about getting a loan to repair your house, it’s about making choices where you’re going to lose money on the sale. Or you could spend your own money and again have less money overall (make the same on the house as with the HELOC, but be out 10k somewhere else).
Again, I’m talking about a situation where you have set-in-stone plans to sell.
I’d definitely check with homeowner’s first, though!! It’s worth a shot.
June 27th, 2008 at 10:10 am
I would doubt your house would pass an occupancy inspection if the chimney is rotting away, so you wouldn’t even be allowed to sell the property until it’s brought up to code. This burden is going to be completely on you; do not expect your homeowner’s insurance to do anything but laugh you away. If you’re intent on selling (which it doesn’t sound like you are, yet) you should get 3 estimates and go with the cheapest reputable company. Plus, I know I wouldn’t want to buy a house with a known rotting issue – it would make me wonder what else was rotten.
June 27th, 2008 at 10:30 am
Lots of recommendations to get estimates in the comments so far… that should be the topic of a future post (hint).
If you have time and want to play the game you can do this. Get 3 estimates for starters. The best price and the best contractor might not be the same one so see if the best contractor can match the price of the best price. If so then you should be happier already.
Then if you want to go further you can repeat by getting 3 more estimates (from additional contractors) letting them know you are trying to get them to beat the best estimate from the last round.
Sounds like a lot of work to me but on a full rehab project it might be worth it.
June 27th, 2008 at 10:46 am
It’s a natural tendency to want to fix everything before putting your house on the market—but it’s almost always the wrong idea! Fix the things you MUST fix (chimney) but forget about changing carpet, major painting, etc. The new owner probably will have other ideas anyway, and you won’t recoup that extra money at sale. My concern with the HEL has to do with the current real estate market. You may spend this money and find you’re still stuck with a house you can’t sell, plus now you have a blasted loan!
This is tricky territory, so proceed cautiously…
June 27th, 2008 at 10:48 am
I like the idea of getting the estimates for the repair costs, but also to see if further damage will occur to your house if left in its current state. The contractors will be able to tell you how advanced the damage is and how likely it is to spread.
If there is the possibility of further damage (especially if you live in an area with all 4 seasons, which can speed up wood damage), then it makes sense to get it repaired sooner rather than later.
If you need to take out a loan to get it done, then consider it. RobY left some very good reasons why getting a HELOC is not an entirely bad idea.
June 27th, 2008 at 11:59 am
You’ve already been given some very good advice in the above comments. Mine will just echo some of the above. Definitely consult a realtor because many things that we might feel need to be done before selling are not items that will gain you any money for the sale, they are just things that might help it sell quicker. We are just buying a home and wound up going for the fixer-upper after asking the seller to do the things required for it to pass inspection. We want to put in the flooring we like and make the changes that reflect our needs vs the seller putting in what they like. Also, the market in your area may be depressed and you might not get near what your house is worth. Since you stated you have 2 years before your child starts high school, maybe that time is best spent slowly fixing what needs fixing so that you don’t run up more debt?
June 27th, 2008 at 1:44 pm
Thanks for mentioning The Money Life Network’s contest we’ve got running – I should also mention we just added two new members to the network, one of them Kacie from sensetosave.com who just commented above.
I would try not to go into debt to fix the problem – I would save up until you have enough to fix – unless – you have firm plans to sell and you know that you could pay the debt off right away. Barring that though, I would do as you usually would tell people, and steer clear of the debt.
Good luck!
June 27th, 2008 at 4:01 pm
Home equity loan in my opinion would be the best option. I do not look at this as debt due to the fact it is being used to make much needed repairs so that you can sell the home. I have a similar situation with my home only the foundation has cracked and it will be about 10k to fix it, I am going to make the other repairs such as painting etc. But I plan to reduce my asking price by the amount required to fix it( I have an estimate) in order to sell it faster. This problem is not something that has to be done as it is not that serious, if the new homeowners want it fixed the price is reduced if they can live with it then they got the home cheaper than I would be able to sell for if I did the repairs.
June 27th, 2008 at 4:17 pm
Thanks for the link!
If you would like a home in WI, let me know. I could hook you up. :)
June 27th, 2008 at 4:35 pm
Estimates, estimates, estimates…but that’s been covered.
One thing I didn’t see mentioned, though, was an alternative to an actual HELOC. Are you planning to do the repairs yourself? If not, you may be able to find a contractor who is willing to perform the renovations for you and settle up when you close on the sale of the home.
I don’t know how quickly or seriously you are approaching the home sale aspect of this, but I know that’s what the wife and I are doing with the new carpet/cabinetry in our home as we fix it up for sale.
~B
June 27th, 2008 at 4:52 pm
I’ll second the idea of finding out if waiting will further damage the home, making the repairs more expensive if you wait (or downright dangerous). I would also start saving immediately in a “home repair” fund!
I used to work in insurance. I agree with above posters, this sounds like a maintenance issue, not a sudden, Act of God issue. It never hurts to call your agent, but I will guess that this will not be covered.
June 27th, 2008 at 6:08 pm
Personally, I think that you know it’s best to stay away from the loans, especially since you obviously don’t have any peace about it. There would also be a lot of uncertainty in it. My advice would be to stop all extra debt repayment or unessential spending. Then, put every bit of money you can into necessary house repairs. All the while, seriously pray for the best deals and more income flow. Then you ought to see progress, and at the right time, you’ll know when to buy another home, and the right direction to go.
June 27th, 2008 at 9:11 pm
Ouch.
I had the same problem with my last house, but I ended up and replaced everything myself, rebuilt and repainted it.
Materials, including a rental lift, was less than $1,000. It might be worth a shot if you have a friend who can do it on the cheap with your help.
Thanks for the mention BTW!
June 28th, 2008 at 9:29 am
My comment deals with the house in the country you want to purchase.
Be sure to calculate the cost of transportation for things like your commute to work, to go shopping, for entertainment, any children’s activities, etc.
I see people making the mistake of not figuring the cost of transportation into their plans and are later shocked at the cost.
The cost of gas alone is now significant and according to experts is likely to go higher.
The only proposal coming out of Congress is a windfall profits tax on oil companies which will not produce a single gallon, cubic foot or kilowatt hour of fuel or power. And who will end up paying such a tax? You and me as oil companies raise their prices to cover the tax.
Just make sure you take all of this into account in making such a big decision.
June 28th, 2008 at 8:40 pm
Anything that has any type of water damage should be fixed as soon as possible. Another year will certainly cause much more damage if you have a leak!
I’m as allergic as you are to loans, but I’d have someone out looking at my chimney this week and be figuring out how to pay for repairs – the construction industry is struggling right now – terms and prices are pretty good. You might be surprised at what prices actually are.
The other thing that I have seen (I own rental houses in GA) is that sometime what looks like water damage is termite damage. The termites damage the wood (looks fine outside but has tunnels inside) and then rain adds to it, making it appear as water damage when it isn’t.
Estimates are free – waiting can have steep costs!
June 30th, 2008 at 3:24 pm
I agree with the other readers that suggesting getting an inspector to take a look. If you let it go while you are saving up, it could cause more damage which would be much more expensive in the end.
If you have a trusted real estate agent, it might not be a bad idea to get their input about whether the increased value in the sale would cover the loan.
HELOCs are at very low rates right now. Be sure to get one without fees or closing costs. You should be able to do that easily in today’s market.
Thanks for mentioning the new Kids and Money site at About.com!