Peeling back the paint and discovering that your house has many, many, many more issues than you bargained for can be a real shock. What do you do when your dream home turns into your own personal nightmare? Is a so-called “money pit” worth fixing? Or is it better to throw in the towel?
Sophia Zaromitidis, Vice President and Lending Leader with First Merchants Bank (NMLS: 1166087), says there can be a light at the end of the tunnel for blindsided homeowners.
First, take a moment to process your discovery – whether it’s a cracked foundation, plumbing and electrical replacement, or a sagging ceiling. Try to focus on remaining calm, and, most importantly, don’t give up hope just yet.
Then, it’s time to get to work.
Get the lay of the land
Handling a money pit takes a lot of legwork, so it’s important to gather as much information as possible to help you plot your path forward.
“I recommend that homeowners try to be as methodical as they can be,” Sophia said. “Start by making a list of every repair and issue that you know of.”
You should also brace yourself for an inevitable part of homeownership and renovations – uncovering more issues as you look into or begin repairs on an initial problem.
“It can seem like an ever-growing list, but just stick with it,” she said. “Try to be thorough, and don’t freak out – sometimes a long list doesn’t necessarily require expensive fixes.”
Next, you’ll want to contact contractors and industry professionals to get a ballpark estimate of how much it will cost to repair.
“When you’re dealing with a home that has multiple major projects, it becomes really important to ensure that you’re getting the suggested three-to-four quotes from different contractors,” Sophia said. “A lot of professionals will provide free quotes, which can be really helpful when you’re trying to budget for major repairs.”
Once you’ve got your list and your ballpark total cost, it’s time to look at the current real estate market.
Check your value
Checking a local real estate website can give you a tentative estimate of the current value of your home.
“Compare that value to your list and your estimates for the work – will the repairs that need to be done increase the value of your home?” Sophia said. “Try to narrow down your list and prioritize things that must be done – structural issues or items with a larger return. I always tell people not to focus on things like replacing the carpet or getting new cabinets. Those can be a big expense but typically don’t increase the value of your home.
It’s ok to throw in the towel
Of course, you may reach this point and decide it’s not worth it – or you may have considered the amount of preparation that needed to be done and realized you don’t have the time or energy to do it. The process of figuring out if your home can even be fixed is a long, arduous one and it’s ok to not be ready for that.
“There’s no shame in deciding that you just aren’t in a place for that level of investment,” Sophia encouraged. “You kind of have to map it out and understand what you’re dealing with and decide, ‘Is it worth my time and effort? Or is it time to let the market take over this property?’”
Unfortunately, there’s no clear playbook or equation or ratio for how much is too much – at least, not with major home repairs.
“I feel like it comes down to, what can you handle? How much savings do you have? What’s your comfort level? How much risk can you take or how much risk are you comfortable with?” Sophia explained.
If you do decide to wash your hands of the whole situation, keep in mind that it doesn’t necessarily mean the entire thing is a wash.
“I think it’s important to remember that, even if you uncover a lot of issues with your home, it doesn’t mean the home is without value,” Sophia explained. “Depending on the real estate market, you can still come out ahead or at least break even if you decide to unload the property – especially if it’s a home where you’ve built up some equity.”
However, if you do decide to proceed, you’ll need to strategize how to cover the cost of repairs. There are several options available, Sophia explained – you could take out a Home Equity Line of Credit (HELOC), a Home Equity Loan (also called a second mortgage), use your savings, get a 401K loan, refinance your home, or attempt to get an unsecured loan.
Each option has its benefits and its drawbacks – and it’s important to find the right one for you.
“When you’re choosing how you want to cover that cost, I encourage you to think about how much money you’ll need, and when,” Sophia said. “Do you need a large lump sum all at once? Do you need funds portioned out over time? How credit-worthy are you? These things will impact which option is best for your situation, and it’s where that prioritized list comes in.”
If you have equity in your home, leaning on that equity with a HELOC or Home Equity Loan (HELOAN) can help cover the cost of repairs. A HELOC will allow you to use funds as needed over time but often comes with a higher interest rate. A HELOAN will give you a large lump sum and typically carries a lower interest rate.
Find out more about how to determine if a HELOC or HELOAN is right for you.
Homeowners can also consider a 401(k) loan – but Sophia cautions that you’ll want to carefully consider your five-to-ten-year plan, first.
“How close are you to retirement,” she said. “Will you be putting your savings at risk? And are you going to be able to pay that money back in the time requirements stipulated by your employer and servicing company? Those loans can be really strict – so you want to ensure you’re doing your research and know you’ll be able to meet those requirements without jeopardizing your retirement.”
Refinancing your home can be another financing option – though it may not appeal to new homeowners or those who purchased or refinanced a home during recent, historically low markets.
“For example, my own mortgage is about 3.25 – do I want to refinance that now and get a higher rate? Personally, no,” Sophia shared.
But if your interest rate is higher than the current market value, it could be a strategy that helps you repair your home and save money moving forward.
Homeowners could also try to get an unsecured loan if they pursue another strategy and still come up short. First Merchants, for example, offers small unsecured loans specifically designed for financing home improvement projects.
An ounce of prevention
However, the best strategy is prevention. If you’re shopping for a home, be sure to get an inspection before you sign those final papers.
“It can be a bit of money upfront, but it really can save you a lot of heartache and expense in the long run,” Sophia said.
Sellers are also required by law to compile a list of known issues with the house – from minor repairs to major fixes. This list should be made available to you when you request information on the home from your real estate agent, or when you make an offer on the home.
“If you’re buying, make sure you’re really looking at that list – don’t skim it over,” Sophia advised. “When you get your inspection, give it to the inspector and make sure the inspector is checking those things.”
An inspector will test systems in the house and check the foundation, the crawl space, the attic, the plumbing, and more to determine if things are in working order and good condition.
“Following an inspection, you can often negotiate with the seller to get a few of those things repaired – or you can make the call to withdraw your offer,” Sophia said.
And, while it’s not as common in the current housing market if you are offered the chance to purchase a home warranty it may be a worthwhile expense. A home warranty provides new homeowners with discounted repair and replacement services for items laid out in a pre-determined contract – and it can possibly save you a big chunk of change if you do end up with a money pit.
“A home warranty gives you coverage in case you move into a home and discover issues after you’re living there,” Sophia explained.
Additional resources
Whichever option you choose, and whichever path you take, having a money pit doesn’t have to be the end of the line.
“Don’t get discouraged and remember to lean on your support network during this time,” Sophia said. “And that includes your banker. We’re always here to help, and we’ll do our best to help you stay on solid financial footing whether you choose to repair the home or sell it.”
