This is a continuation of the story about how we bought our first house. If you have not already done so, please read the 'Buying our first house. Part 1' blog.
As the story goes...we had just successfully wrestled our house away from the grips of Bill Murray and his gang of house flipping cash boys. Or something like that.........
Let's just say that we had finally gotten an offer accepted on a house. And remember, this was the fifth house we had put an offer on. So we were thrilled and relieved to have finally gotten to this point. Our dream of owning a house downtown was finally within our grasp. All we needed to do was make it through the bank closing and we would be home free! Pun intended.
And that is when things got cray-cray (what the kids are calling crazy these days).
Remember, I referred to this house as a ‘fixer-upper.’ Since this was not a move-in-ready house and I had high aspirations of architecting an award-winning renovation, we would need a renovation loan in addition to the traditional mortgage loan. Luckily, we found a great loan with First Citizens bank that combined the renovation and mortgage into one package. This loan had many great benefits.
Here is the cliff’s notes version of our loan:
- The bank provides a renovation loan that is lumped into your mortgage.
- The amount of renovation money can be up to 50% of the house cost. For example, if you purchased a 100K house, then the bank would allow for up to 50K for renovation costs. Your mortgage would then be (150K – (your down payment))
- Prior to closing, the bank appraises the house for the value of the home post-renovation.
- The loan works only if that post-renovation appraisal is more than the total loan amount. For example, if the house appraises at 165K, then you are in the clear and have 15K of instant equity.
Sounds good, right?...Well, pretty good, but here's the tricky part.
Before the bank can even begin the closing process, you will need to have an estimate from a licensed general contractor for the renovation work. And the closing process can take up to 45 days to complete. What does the bank do during those 45 days.....who knows! For most people that are not architects, this process is probably pretty simple. They would simply find a contractor and ask for a quote on their new bathroom and kitchen.
But for Steve Ramos, aspiring super architect, the task was much more complex and included the following arduous steps:
- Measuring the entire house; walls, windows, doors, ceiling heights, interiors, exteriors, etc.
- Using those measurements to build a Revit model. Revit is a 3D modeling software. Often referred to as BIM technology or Building Information Modeling. It's all the rage in the profession right now.
- Use that Revit model to generate a set of as-built drawings.
- Creating the new design. This would take several iterations before selecting what we thought was the final design.
At that point we were then ready to:
- Find multiple contractors, meet with each one individually and ask for a bid to perform the work. I gave each one a full week to generate the bid or estimate. I talked to 4 contractors total. Two of the contractors were too busy to even generate an estimate and ultimately turned the job down. WTF! So it came down to the other two.
- Based on the bids and our meeting, selecting one of the two contractors.
- Working with the selected contractor to value-engineer the design and negotiate the final contract amount. Value engineering has jokingly been referred to in our industry as DE-value engineering. It basically means that you cut costs by either removing actual pieces of the design or lowering the quality of certain parts or pieces.
- Agreeing to a final contract.
That’s a lot of stuff that needs to occur before the bank can even begin the closing process. Then the bank needs another 45 days to complete closing. And guess what, the seller for our house wanted to close as soon as possible so that they could get out of town. And who’s to blame them? This is why Bill Murray and those house flipping companies who were offering cash had such a big advantage. They could avoid the loan financing aspect and expedite the sale. Hence the phrase “Cash is King.”
Ultimately our closing date got pushed back on 2 separate occasions and the total process took 60 days. Each time that we delayed the closing the seller added a penalty clause to the contract and threatened to walk. In hindsight, I think they were bluffing, but for a couple of newbies, this was a very stressful time. All of that stress and cray-cray can be chalked up to timing. Because the market was hot, we were forced to act quickly. And because we were pursuing a renovation loan, the closing process was much more complicated and got extended putting unnecessary pressure on the seller and ultimately us.
In the end, it all worked out well and we learned a ton from the process. We closed in September of 2013 and have loved our home.
And would we do it again? Hell yeah! We are actually working on the phase 2 renovation now and will likely pursue the same loan package.
Our house has become a big part of our lives and will likely be a reoccurring topic on this blog. I am especially looking forward to talking about the design and renovation, but I wanted to lay the ground work first. This picture is a sneak peek:
I must point out that this photo was taken the day we closed on the house. Which means that upon purchasing our first house, I immediately started destroying it. This picture also highlights the sad state that the house was in. The light fixture was pretty baller though!