Should I Refinance and take out a Home Equity Loan for a major renovation ($250k-$350k) or sell the property under-value?

Hello PFC,

I’ve got a somewhat complex situation and am looking for some financial advice. I’m inheriting a dilapidated home in San Diego that’s completely paid off. Realistically, the home is the only one I will ever own in this market but it needs a lot of work. Like a complete renovation/gut of $250-$350k in repairs type of work. Given all I’ve read from PFC posts about these types of hidden costs in owning a home, do you think it’s a wiser investment to cut my losses and sell it under-value or refinance/take out some kind of Home Equity Loan to make it a primary residence? Or, the third option could be that I put in basic/minimum repairs necessary to get it into a better shape to sell at market value.

Some context:

In the current condition, the house is likely to sell at $250k based on estimates I’ve gotten and then I’d have to split that money 4-5 ways whereas if I fix it up, it stays in my name.

This could help me skirt traditional mortgage costs and allow me to get a property without having to put the 10-20% down payment on a wildly expensive and limited market. Of course, I’d be responsible for the interest on the refinancing/loan and any future hidden costs associated with it though.

Thank you!

Why would you have to split up the money if you sell, but you get to keep it all if you live there? That seems strange to me. Can you elaborate on that?

Also, if it was a nicely remodeled home, would you want to live there? Is it in the right area? Is it the right size? (i.e. do you need a home that big)

Hi Jeremy,

It comes down to family dynamics. The sale of the home would have to be distributed amongst my siblings whereas if I take ownership, the home stays within the family but with me having ownership and responsibility to fix it. Currently, it is not in my name, so that’s why I wouldn’t have much leverage in determining how the proceeds of the sale would be distributed. I inherit the home only if If I decide to take on the responsibility.

And yes, I think if we remodeled the home in a manner that is more invested than a house flip, then I would think I would want to live there. It’s the right size to allow me to consider having a child. That of course comes with additional financial planning as well though.

Is that in writing? If you remodel it, all the siblings lose all ownership of the property? What counts as remodeling it? Are you required to live there for a certain period of time? Who gets the money when you sell it? Whose decision is it whether to sell?

I worry that there could be a rough outcome where you take a loan, spend 6 months remodeling it to the tune of $200K, then the other owners see how valuable this place has become and want you to sell it so they can have their piece of the action?

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The same thought crossed my mind, which is why ownership would transfer to me before remodeling anything so that I’d have a legal outlet to cover the investment. At that point, anyone trying to suggest selling it wouldn’t have much legal standing.

If the decision to sell the house as is happens, then the current owner gets to make those decisions on when and how to distribute the sale of the home. If the decision to sell it after transfer of ownership and investment of renovations, then it would be me as the new owner.

And remodeling it would be to fix the house to get it up to code at the very least.

Huh. Well that whole situation still concerns me. Like maybe the 4 other owners don’t feel like gifting you $50K each so you can have a free home and remodel project?

BUT, assuming it all works out like you say, I think it’s really a matter of the ARV (after rehab value) and the the remodel cost.

So if you can sell for $250K. And the after rehab value is $350K. And it’s a $200K remodel. Well… then you’ll lose $100K by doing the remodel. But if the remodel is $200K and the after rehab value is $600K, well then you’re better off doing it. I’m painting with a broad brush here, but you get the idea.

I suspect it’s mainly/exclusively “flippers” who would be buying your house. They’re likely offering $250K because there is still some profit margin left for them after they do the rehab. But also, keep in mind professional flippers are often studs with super low cost remodel teams and tons of experience who get in and out. If they can do it for $100K, it might cost you $200K and that blows the whole profit margin.

On a separate note, home equity lines of credit often don’t have as advantageous of terms as a straight up mortgage. I’ve never done one, but I’d pay careful attention to the details of the HELOC and whether it’s possible to fund the whole remodel that way.

I guess some other questions: What’s your current financial situation? Any debt? How much cash do you have? How much in investments?

Thanks for the valid concerns. I definitely intend to iron out details about the entire family dynamic before making any moves either way.

I’ll take a close look at ARV numbers and compare to market analysis as well as mortgage, HEL, and HELOC refinancing options.

Thanks for the wisdom!

Current financial situation is okay. No debt other than a 0% APR car loan. 6 month emergency fund in reserves currently being padded for an extra 6 months due to covid. Started investments in 403B and ROTH. Followed your advice with index funds.

Hi Jeremy, I have a similar situation w/ inheriting my Parent’s HELOC debt of $67k. It’s a blessing in disguise because I will have joint title of their home. (completing a quit claim deed to add my name on the title). I feel like it’s a mortgage payment.

The home is valued at $281k - $321k. However, similar to FinanceHelp’s situation, it needs major work done (1963 home that’s never been renovated). I need to run the numbers like you said comparing ARV & the remodel cost. I could always learn, put some sweat into it and could come out way ahead.

So the HELOC loan is interesting… it’s a 15 year simple interest @3.99%. My father has been paying interest only for 15 years (roughly $45,000 - wow!). Here’s what I got off the internet in regards to simple interest loans vs. amortizing loans, “The main difference between amortizing loans vs. simple interest loans is that the amount you pay toward interest decreases with each payment with an amortizing loan. With a simple interest loan, the amount of interest you pay per payment remains consistent throughout the length of the loan. Amortizing loans are more common with long-term loans, whereas short-term loans typically come with a simple interest rate.”

So the draw period on the HELOC is coming to an end and under the contract, he will have 10 years to pay off the $67k along w/ 3.99% daily interest.

Although it’s pretty disgusting what’s been going on, I’m confident I can pay off this debt within 6-8 months. (I will sell some of my dividend stocks that don’t have much capital gain appreciation and with less than 5.7% yield).