Home renovations – leave the drama for the screen.
When a homebuyer is focused on watching a home renovation show, are their eyes really open to everything that goes into homeownership?
Jason Smith (pictured), head of revenue at Cloudvirga, knows his way around the mortgage game.
But he too has been caught off-guard with the realities of homeownership.
Smith recently made the move from Missouri to northeast Florida, and with the warmer weather, came new realities of living in the tropics that he had never had to contend with before.
He moved into a new build and shortly after arriving, “We’re looking at a filtration system and a water softener,” an investment of nearly $7,000. “Frankly, it’s a necessity. But it’s another cost. I didn’t think that within the first week I would be spending this much money,” for such a device.
Another Florida reality was a type of mosquito he had never dealt with before.
“I like to think I’m educated,” he said. “I’ve been in the industry for a long time. I’ve owned a home before. But there are inherent differences associated with moving to a different region.” Water softeners and paying to get rid of mosquitos had not crossed his mind.
The machinery and contracted bug services are now installed at his house, but Smith knows that others are not as lucky as he is to absorb such a cost. And it helped him better see the blind spots that might go into home buying and renovations.
“We tend to think that it is a Millennial thing,” he said, “but it’s not. If you’re not working with a true partner, and you’re not getting educated as far as everything that’s included in (the purchase), even things as simple as the cost of utilities, can be detrimental to the bottom line. People don’t think about that when you get an older house. Your utilities are going to be twice as much as they are with a new house - because you’re not going to have the insulation. You’re not going to have the windows or the efficiencies that have developed in the last few years. Old houses cost more in every way.”
Another cost that can be overlooked are HOA fees or development fees, which can add up. A monthly $600 fee can add more than $100,000 on to the price over time. And don’t forget about special assessments, everyone’s favourite when the condo needs a new roof, or the community rec room needs a new water heater, “or the neighbourhood needs new pool bathrooms because the teenage hoodlums have somehow lit them on fire – yeah, that happened,” he said.
So what about fixer-uppers?
Like many people, Smith has watched his share of home renovation shows on TV, where an old eyesore is turned into a home with impressive curb appeal in 30 minutes.
“I’m a total DIY guy,” said Smith with a grin. “I have every kind of tool you can imagine,” having learned a lot from his dad. But watching those shows “always cracks me up,” when someone who has never swung a hammer before is suddenly, in the next scene, helping pull down a wall.
Most viewers know that editing and some Hollywood magic is at play on these shows. But when it is your home renovation, on your budget, reality comes into play.
“Your idea is that I’m going to make this home what I want it to be in three months,” working on it every weekend, for example, which may not be realistic. “It’s really interesting how a lot of those people are buying in areas without necessarily thinking where it’s going to be, in a few years, or where it is now.” He joked that people like to buy in up-and-coming areas – but don’t think about the years it takes for the area to up-and-come, and those intervening years can cause extreme “buyer’s remorse.”
He worries that the reality show effect creates “false hope and false understanding… they don’t realize how much psychological and emotional pressure that puts on you.”
This is where lenders and brokers can help mitigate a client’s expectations about a Fix and Flip.
During a home refinance, Smith was finishing up some paperwork with a couple to help them access some money to pay off some debt. Looking at how much money they were saving, one of the duo looked at their spouse and said: “I can go shopping again!”
Smith used this as a learning opportunity and politely but firmly told them, “I’ll see you again in 12 months, which I really didn’t want to do.”
He believes that brokers and agents need to be a “true advocate” for their clients, even if it means being frank.
“I have long said that the wrong person, the wrong lender, will bury you in whatever house that you want,” Smith said. “And that’s a matter of folks overstepping their boundaries because, even if you go by Fannie Mae, Freddie Mac, DTI guidelines, and if you have good credit, and if you have good assets, you can get buried into, frankly, anything.”
Just because a home may fall within your financial threshold “doesn’t necessarily mean that it’s the smartest move for you.” Balancing realities with fantasies, when people “get really excited about the possibilities as opposed to the realities,” puts brokers and agents in a necessary and important place in the conversation: The Realistic Voice.
“Our responsibility is to make sure they’re seeing the realities of the situation as well as the dream,” he said. While some churches require a marriage preparation course before a couple ties the knot, and new drivers need to pass a driving test, most conventional home buying “does not require any sort of education.” There are exceptions, with some states that offer downpayment assistance which typically require some education.
There are anti-steering laws, and professional guardrails, but for homebuyers, “The people they rely on most are going to be the real estate agent and their mortgage person, their bank, as far as education,” he said. “What we can do is create real education for them.”
Rather than just showing a client how much they can afford, the education can extend to rehabbing your home, future costs, maintenance, unexpected costs, etc.
“It’s going to set you up as an advocate for your borrower or your realtor partners,” he said. “And it’s going to get you more business and it’s going to give you more meaningful relationships that are going to help grow your business. But it’s also going to help start to create better generational borrowers.”
He added that “as an industry, it behooves us to be proactive in that Reality Education process. Sometimes building trust is simply pointing out Reality, not simply agreeing. And building trust leads to retaining clients.”