Math for the Win

Here is another update from 203(k) land, where the paperwork is plentiful and the math is mandatory.

One of the things i have to do to get this loan approved is get my general contractor’s “scope of work” all written up fancy-like, so the FHA knows what we are doing to the house.  Then an appraiser – who is independent, and who I never meet, see, or talk to – takes that paperwork, and takes a look at the house.  Because of his skill and expertise, and also a little bit of voodoo, he is able to create an appraisal that predicts the value of the house after the work is done.  This lets the FHA know they are underwriting a loan that is actually supported by the value of the property.

Now I’m going to dish the dirt on the money, because I think not talking about money just keeps people in the dark.  I want to demystify the process, so here are my numbers.

Purchase price: $105,000  (getting a little cash back at closing, but forget about that for right now)

Cost of renovations: $35,000 (this price plus the purchase price make up the loan amount)

Total Cost of Elephant Culo: $140,000 (plus shipping and handling).
So for this bad boy to be a go, the house has to appraise for better than $140,000, which makes sense, because that’s what the bank and I are paying for the house.  You with me? 
Good.
Here is where it gets sexy.
If the appraisal says the house is worth more than $140,000, then the bank is happy because if, God forbid, they end up owning this house, they can be fairly confident they’ll be able to get back the money they have in it.  I am happy, because I am sitting on what is known as equityEquity is the value of your home less what you owe on your home.  It works for cars, too, except cars don’t generally appreciate over time, and homes can. Having equity in your house is awesome because if you sell your house for more than you owe on it, you keep the difference – you MAKE money.  Nice, right? 
Elephant Culo appraised for $165,000.  Booyah, bitches.  On paper, once I close and the work gets done, I’ll be sitting on an additional $25K in equity over and above my downpayment.  Not bad.  Another way of looking at this is that $35,000 of improvements yields $60,000 in value.  Also not bad. 
But it’s not like I’ll have an extra pile of cash in my house.  That value is just on paper, and it’s only this appraiser’s opinion.  It is his opinion based upon his knowledge and the relevant comparable homes in the area, but in reality, the house is worth whatever the next buyer will pay for it.  Still, it’s nice to know that this big ol’ risk is likely to have an immediate payoff, even if it is just a payoff on paper.
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