What to Consider When Building

Maybe It’s Time to Remodel . . .


Perhaps it was that moment when you realized that avocado green and harvest gold are no longer the "in" colors for today's trendy kitchens. Or maybe you had an epiphany one day as you stood in line to use your own bathroom. Whatever the impetus, the thought has crossed your mind: Maybe it's time to remodel . . .

If you decide to follow through on that thought, you'll join millions of others who decide to remodel their homes each year. The reasons for remodeling are as varied as the projects we undertake. Some of these include:

  • Adding more space.

  • Upgrading cabinets, counters, appliances, and fixtures.

  • Creating a floor plan that's customized for your lifestyle.

  • Improving energy efficiency with new windows, doors, insulation, and climate control systems.

  • Increasing the resale value of your home.
     

What do you want?

Before you head too far down the remodeling path, it's a good idea to think through your wants and needs:

  • Decide what changes you want to make.
  • Ask yourself and other family members what you like and dislike about the house, then create a prioritized list.
  • Look at magazines and collect pictures of what you like.
  • Think about traffic patterns, furniture placement, colors, lighting, and how you want to use the remodeled space now and in the future.

Move or Improve?

If you want to change your home, your other option besides remodeling is to find a new one. But more and more American families are deciding to stay put and improve their existing home. Here are some of the reasons:

  • Remodeling allows you to customize your home to meet your needs and desires. The only similar, but much more costly alternative, is to have a brand new custom home designed and built.
  • Remodeling means that you don't have to give up a familiar neighborhood and schools.
  • Remodeling is a more efficient use of your financial resources. According to the American Homeowner Foundation, selling your home and moving typically costs about 8-10 percent of the value of your current home. And much of this goes into moving expenses, closing costs, and broker commissions - items that have no direct impact on your home's quality.
  • Remodeling can be stressful, but few experiences are more stressful than moving.

Return on Investment

While there are many reasons that people choose to remodel, the bottom line is that remodeling makes your home a more enjoyable place to live. The intangible value of this added pleasure needs to be considered, along with any resale value you hope to gain.

But there is no doubt that, as far as improving the sale of your home, all remodeling projects are not created equal. The general rule of thumb is that any remodeling project that brings your home up to the level of your neighbors' is a worthy investment. But it doesn't pay to be the most expensive house on the block - real estate experts recommend that a remodeling investment should not raise the value of your house to more than 10 to 15 percent above the median sales price in your neighborhood.

Remember that potential buyers will be comparing your home to ones newly built. Therefore, you'll want to look at the design trends and amenities being built into new homes. Great rooms (open kitchen/family room arrangements), master bed and bath suites, and higher ceilings are a few of the features sought by today's home buyers.

Each year, Remodeling magazine conducts its "Cost vs. Value" report to assess which remodeling projects create the greatest return on investment. Not surprisingly, kitchens and baths regularly come out on top. These are two of the most used rooms in the home, and they receive the most scrutiny from potential buyers.


Do-It-Yourself or Hire a Professional?

Do-it-yourself (DIY) projects have skyrocketed in popularity in recent years on the heels of Martha Stewart Living, HGTV, and other popular home improvement shows and publications. And, for certain small projects, a DIY project can be rewarding and fun - if you are prepared and have the proper skills. But before you start knocking down walls and taking out wiring, ask yourself the following questions:

  • Do you have a clear idea of what you want your project to look like?
  • Do you have the time to complete this project (be realistic!)?
  • Have you ever undertaken a project like this before?
  • Do you know everything you will need (materials, tools, etc.) to complete the project?
  • Are you familiar with the applicable building codes and permits?
  • Do you enjoy physical labor?
  • Do you have all the tools you will need?
  • Do you have the necessary skills for this project?
  • If not, do you have the time and resources to learn these skills?
  • Where will you obtain the necessary materials?
  • If you cannot complete the project according to your original schedule, are you (and your family)prepared to handle the resulting inconvenience?
  • Will you need assistance with this project? If so, who will assist you? Do they have the time and skills required for this project?
  • Do you understand all the safety issues associated with this project?
  • Are you familiar with the architecture and structural makeup of your home (i.e., how knocking down one wall will affect the rest of the structure)?
  • Have you considered the hidden costs associated with doing it yourself - time, tools, and the possibility that you may actually decrease the value of your house if the result isn't up to professional standards?

It is easy to look at the cost of hiring a professional remodeler and think only of labor and materials. But remember that a professional remodeler offers you an important service - years of experience, the right tools, a network of suppliers and subcontractors, and an in-depth understanding of legal regulations, cost estimating, scheduling, and the latest construction techniques.


Dollars and Cents: Financing Your Project

One of the most important considerations for your home improvement project is financing. After all, the project will go nowhere if you can't pay for it. Fortunately, there are several options that can provide the dollars you need. Four of the most common are a home improvement loan, a home equity line of credit, a home equity loan (second mortgage), and a cash-out refinancing of your current mortgage. However, the take simplest method of financing is cash.

Cash

If you have cash in savings to pay for your remodeling project, this may be the best way to finance your home improvements. But be sure to consider the fact that, by paying in cash, you tie up money that could be earning interest in other investments. In other words, you need to look at the interest rate that you would be charged by financing the project and compare this to the interest you could earn by investing these funds. Also remember that interest payments on a home improvement loan are usually tax-deductible, while you can't write off the expenses of a remodeling project paid for in cash. Crunch the numbers and meet with a financial advisor to determine whether paying in cash will really pay off in the long run.

Home Improvement Loan

Two special loans administered through the Federal Housing Administration (FHA) are the Title I and Section 203(k) programs. A Title I loan allows you to borrow up to $25,000 for improvements to a single-family home. These are fixed-rate loans that FHA insures against the risk of default. Loans must be made by an approved Title I lender. The 203(k) program is not as well known, but if you are looking to purchase a fixer-upper, it is a terrific opportunity. It allows home owners to receive a single, long-term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of the property. To obtain a loan under the 203(k) program, you must use an FHA-approved lending institution.

Home Equity Line of Credit

A home equity line of credit is a form of revolving credit in which your home serves as collateral. This allows you to tap into these funds whenever you need it. The credit line is usually set at 75 to 80 percent of the appraised value of your home minus the balance of the mortgage. Your credit history and ability to pay may also be considered in determining the amount of credit available. Home equity lines of credit usually carry a variable interest rate that is figured by adding a margin to the current Prime Rate. Other costs associated with setting up a line of credit may also apply and will vary from lender to lender.

Second Mortgage

If you are not comfortable with the open-ended nature of a line of credit (which requires discipline to ensure that you don't go way over budget), a home equity loan, or second mortgage, may be right for you. This is a fixed-rate, fixed-term loan based on the equity in your house that is paid back in equal monthly installments over a specific period of time.

Cash-Out Refinancing

If interest rates today are significantly less than when you first purchased your house, refinancing your mortgage may be a wise move. This financing alternative involves taking out a new loan that would allow you to pay off your existing mortgage and use the remaining funds for your remodeling project. Make sure you factor in the length of time you plan to live in the house and the number of years left on your current mortgage before you decide to refinance.

Keeping Your Budget in Line

Once you've decided how much you can afford to spend fulfilling your remodeling dreams, the real challenge is making sure you stick to this budget. So, how can you prevent your expenses from spiraling out of control?

Plan on spending only 80 percent of what you can afford. Put the additional 20 percent in reserve to cover changes, unforeseen problems, and miscellaneous charges.

Remember that anything not included in the original contract will cost extra. It's very easy to start tacking on hundreds and even thousands of dollars in change orders that will break both your budget and your timeline.

Stay focused on the task at hand. Stick to the project you have planned rather than deciding that now is the time to overhaul the rest of the house.

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Understanding Your Contract



Once you've picked a remodeler, no work should begin until you have reviewed and signed a written agreement or contract that spells out in detail the what, where, how, time span, and cost of your project.

What should your contract include?

  • The contractor's name, address, telephone number, and license number (if applicable).

  • A visual representation - blueprint, floor plan, sketches - that shows what the remodeler will do and where.

  • The timetable for the project, including approximate start and completion dates.

  • The price and payment schedule.

  • Detailed specifications for all products and materials. The description of each item should provide enough detail to clearly identify it, such as the brand name, model number, color, and size. This section of the contract may also describe any materials to be selected later, who will choose them, and the amount of money (called an allowance) set aside to pay for each item.

  • Information on who will obtain and pay for necessary permits and other approvals.

  • Insurance information.

  • The procedures for handling change orders.

  • Lien releases to ensure that you are not held liable for any third-party claims of nonpayment.

  • Provisions for conflict resolution in the event of a contract dispute.

  • Notice of your right under the FTC's Cooling Off Rule to cancel the contract within three days if it was signed someplace other than the remodeler's place of business.

  • Details on issues like access to your home, care of the premises, phone and bathroom use, and cleanup and trash removal.

  • Once you have read your contract carefully, review it with your remodeler to clarify any wording you do not understand. If you still have questions after this meeting, you should discuss them with your attorney. When all your questions have been answered, you're ready to sign the contract.

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Deciding Where to Live


Location is one of the most important considerations when shopping for a new home. Weigh the pros and cons of living in Brandon, Hartford, Chester, Colton, Crooks, Junius, Lyons, Valley Springs or the country. Compare locations as carefully as you compare houses. Consider practical aspects such as time and distance to work, schools and shopping, and the availability of public transportation. Make personal observations, but also consult with your builder, local government, friends, and if possible, people in the neighborhood. As you explore each home, use the following checklist to help determine whether the location suits your needs.

  • Shopping. Are adequate shopping facilities nearby?

  • Police and fire protection. Are police and fire protection adequate?

  • Medical facilities. Is there a hospital or medical center nearby?

  • Schools and day-care. Are schools in a convenient location? Are convenient day-care facilities available?

  • Traffic. Are the streets quiet enough? Does the speed limit on the streets suit you? If you have children, will they be safe from traffic hazards?

  • Parking. Are parking and garage facilities adequate?

  • Transportation. Is public transportation frequent and convenient?

  • Trash and garbage collection. Are trash and garbage collection adequate?

  • Recreation. Are there suitable parks and recreational facilities nearby?

  • Places of worship. Are places of worship available and convenient?

  • Privacy. Do the lot and house offer adequate privacy?

  • Water. Does the community have a reliable source of drinking water with adequate capacity to meet present and future needs?

  • Sanitation facilities. Is the sewer system or septic tank adequate and reliable? Does it meet present and anticipated future needs?

  • Landscaping. Is the land well-drained? Has proper landscaping been done to prevent erosion? Is the landscaping attractive and likely to enhance the value of the home?

  • Taxes. Are the property tax rates reasonable? Is either the tax rate or the value of the house likely to change enough to cause a substantial increase in your tax payment?

  • Assessments. Are there special assessments that will force you to pay added monthly charges for a specified number of years?

  • Nuisances. Are there nearby sources of noise, smoke, soot, dust, odors or other hazards that will affect the housing environment?

  • Are any development plans under consideration that could substantially change the nature of the community?

  • Flooding. Is flooding a potential problem?

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Tax Advantages of a New Home


Buying a new home is one of the smartest purchases you can ever make. One of the reasons is that homeownership has many positive tax implications. Because of changes to the tax code passed in 1997, these tax implications are much more favorable for most homeowners today than in the past.

According to the law, married homeowners do not have to pay taxes on up to $500,000 in capital gains realized on the sale of their homes. The $500,000 provision applies to married homeowners filing joint returns and is restricted to homes sold on or after May 7, 1997. To qualify, the home would have to have been used as a principal residence for at least two of the previous five years. Taxpayers who file individual returns may claim up to $250,000.

According to the previous rules, the tax on any profit would be deferred if the sellers of the home bought and occupied another home of equal or greater purchase price within 24 months before or 24 months after the sale of the old residence.

The previous law also allowed for a one-time capital gains exclusion. Home sellers who were at least 55 years old could realize a tax-free gain of up to $125,000 if the home had been used as a principal residence for at least three of the previous five years.

Under the old law, home sellers could use their capital gains exclusion only once after turning 55. Under the new law, people over 55 who have already used their exclusion can take advantage of the new tax provisions, assuming that they have occupied their new residence for at least two of the previous five years.

First-time buyers also benefited from a special provision of the new tax law. One of the largest obstacles to homeownership usually is the inability of potential first-time buyers to save enough money for a down payment. In 1997, Congress passed a new provision allowing first-time buyers to withdraw up to $10,000 from their IRA accounts if the money is used for a down payment on a home. The penalty-free provision can be applied to IRAs owned by the buyers, their parents or their grandparents. Under current law, early withdrawals from an IRA incur a 10 percent penalty.

Calculating Your Available Down Payment

The down payment is the difference between the price of the home and the amount of your permanent loan. The earnest money deposit you give the builder when you sign the contract is part of the down payment. If you’re building a home on a lot you own, your lender may consider the value of your land as part of the down payment. Options, upgrades and changes you pay for during construction can also count toward the down payment total. You pay the balance of the down payment at closing. The graph below offers a worksheet for determining your available down payment.

Geothermal Heat Pump Tax Benefit

The State of South Dakota offers a property tax credit for the installation of a renewable resource energy system.  A geothermal or ground-source heat pump is considered a form of renewable energy.  The homeowner receives a 3-year full credit and a 3-year diminishing credit to the original property owner.

An example would be as follows for a $20,000 installed cost of a geothermal heat pump.

If the county has an 11/2% tax rate, the first 3 years would be approximately $300, amounting to $900.  The next 3-years of diminishing credit (75%, 50%, 25%), would yield $400.  The 6-year credit total in this example would save $1,300.  If there is an application after 2 years of home construction, the property owner can still receive 1 year full and 3 years of diminishing credit.

Application for this tax credit needs to be made only the first year, not each year.  A retrofit geothermal installation is eligible for the tax credit.  Applications must be filed between November 1 and December 10 in order to qualify for the tax credit.

You may contact your local county equalization director or the South Dakota Department of Revenue.

You may also go to www.state.sd.us and print the form from the state web site by following these steps.

  1. Select Business
  2. Select Revenue Regulation
  3. Select Property Taxes
  4. Select Forms
  5. Scroll down to Claim for Property Tax Credit on Renewable Resource Energy System
  6. SDCL 10-6-35.17

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The New Home Walk-Through


Before you go to settlement on a new home, you and your builder will "walk through" the house to conduct a final inspection. The walk-through provides an opportunity for you to learn how your new home works and to spot items that need to be corrected or adjusted.
Often, a builder will use the walk-through to inform buyers about:

  • The operation of the house's components.

  • The buyer's responsibilities for maintenance and upkeep.

  • Warranty coverage and procedures.

  • The larger community in which the home is located.

When you buy a new appliance or piece of equipment, such as a washing machine, you usually have to read the instructions before you can understand how to use all of the features. With a new house, you will be receiving a stack of instruction booklets all at once. It helps if someone can take the time to show you how to operate all of the kitchen appliances, the heating and cooling systems, the water heater, and other features in the home. Such an orientation is particularly useful considering that when moving into a new home, people often are so busy that they have trouble finding time to read instruction booklets.

Learning about maintenance and upkeep responsibilities is very important. Most new homes come with a one-year warranty on workmanship and materials. However, such warranties do not cover problems that develop because of failure to perform required maintenance. Many builders provide a booklet explaining common upkeep responsibilities and how to perform them.
Should a warranted problem arise after you move in, the builder is likely to have a set of warranty service procedures to follow. Except in emergencies, requests for service should be in writing. This is not because the builder is trying to be bureaucratic. Rather, it is to ensure that everyone clearly understands the service to be performed. The person receiving a service request is not likely to be the person performing the work, and you don't want to rely on word of mouth for transmission of your service order.

Many builders schedule two visits during the first year -- one near the beginning and the other near the end -- to make necessary adjustments and to perform work of a non-emergency nature. You should not expect a builder to rush out immediately for a problem such as a nail pop in your drywall. Such problems occur because of the natural settling of the house and are best addressed in one visit near the end of the first year.

If you have moved to a new home from a nearby area, you probably will not spend much time at the walk-through talking about the larger community in which the home is located. However, if you are moving to a new community, a builder can often provide a packet of material to help you become acclimated.

With respect to inspecting the house, an effective way to handle this is with a checklist. The list should include everything that needs attention, and you and your builder should agree to a timetable for repairs.

Builders prefer to remedy problems before you move in, because it is easier for them to work in an empty house. Some items may have to be corrected after move-in. For instance, if your walk-through is in the winter, your builder may have to delay landscaping adjustments until spring.

It is important that you be very thorough and observant during the walk-through. Carefully examine all surfaces of counters, fixtures, floors and walls for possible damage. Sometimes, disputes arise because a buyer may discover a gouge in a counter top after move-in, and there is no way to prove whether it was caused by the builder's workers or the buyer's movers.
Many builders ask their buyers to sign a form at the walk-through stating that all surfaces have been inspected and that there was no damage other than what has been noted on the walk-through checklist. Ask a lot of questions during the walk-through and take notes on the answers.

Never be afraid to appear stupid by asking too many questions. That is how you learn. It is important to view the walk-through as a positive learning experience that will enhance your enjoyment of your home.


Walk-Through Checklist Items

Grading

  • Does the ground around the foundation slope away from the house?

  • Make sure the water does not pond in swales. To check, water the areas with a hose, if possible.

  • Are there signs of erosion?

  • Is the shrubbery placed at least 2-3 feet from the foundation?

  • If the house has a basement, are the basement window wells clean and graveled?

Roof and Gutters

  • Are the shingles flat and tight?

  • Is the flashing securely in place?

  • Do the gutters, downspouts and splash blocks direct water away from the house?

Exterior Appearance

  • Are the windows and doors sealed and protected by weather stripping?

  • Are the trim and fittings tight? Are there any cracks?

  • Does the paint cover the surface and trim smoothly?

  • Has landscaping been installed according to the terms of your contract?

Doors and Windows

  • Are all doors and windows sealed?

  • Do they open and close easily?

  • Is the glass properly in place? Is any loose or cracked?

Finishes

  • Is the painting satisfactory in all rooms, closets and stairways?

  • Did the painters miss any spots?

  • Are the trim and molding in place?

Floors

  • Is the carpet tight? Do the seams match?

  • Are there any ridges or seam gaps in vinyl tile or linoleum?

  • Are wooden floors properly finished?

Appliances, Fixtures, Surfaces, Etc.

  • Do all of the appliances operate properly?

  • Are all of the appliances the model and color you ordered?

  • Check all faucets and plumbing fixtures, including toilets and showers, to make sure they operate properly.

  • Check all electrical fixtures and outlets. Bring a hair dryer to test the outlets.

  • Do the heating, cooling and water heating units operate properly? Test them to make sure.

  • If the home has a fireplace, do the draft and damper work?

  • Are there any nicks, scratches, cracks or burns on any surfaces, including cabinets and countertops?

  • Test the doorbell. Also test the intercom system, garage door opener and any other optional items.

Basement and Attic

  • Are there indications of dampness or leaks?

  • Is there significant cracking in the floors or foundation walls?

  • Are there any obvious defects in exposed components, such as floor joists, I-beams, support columns, insulation, heating ducts, plumbing, electrical, etc.?

Certificate of Occupancy

  • Has your local municipality signed off on your house?

Some problems may not be readily apparent during the walk-through. Even a professional inspector might miss a few. Most warranties cover any such problems that are the result of faulty workmanship. However, warranties usually exclude problems that result from owner neglect or improper maintenance.