Definition of Sweat Equity
Home improvement shows abound, there are many homeowners that want to increase the value of their property at minimal cost and we all know that labour for any job is typically the most costly portion of a renovation. Enter the handy homeowner. A simple DIY project (if done right) can improve the value of a property for resale or command more rent for an investment property. From redoing entire floors to simply replacing those faulty door knobs to patching those scratches on the drywall (thank you movers), a homeowner can save time and money at the expense of effort, while picking up handy skills, by doing work themselves.
The most contentious part of doing work yourself is ensuring that fixes are up to local safety standards. Doing work yourself that ends up being faulty can also invalidate insurance that you may have on your home and depending on the covenants on your mortgage and the technical skills required (ex. installing electrical wiring in your house), you may not be able to make fixes without the help of a professional tradesman.
It should be noted that sweat equity is generated when it maintains or increases the value of the property; the improvements should make the property more liveable. A botched job on the backyard meets neither of these and will likely leave the homeowners in a worse position than they initially came into the project (hence the plethora of shows we now see on TV).
You can think of sweat equity as the amount you should have paid for the work less what you actually paid. For instance, if a contractor quotes you, as the homeowner, $10,000 to redo your bathroom and you manage to do it yourself for $4000, you can say that you generated essentially $6000 in sweat equity. This is so because the improvement would have normally taken $10k to complete, but you saved yourself the extra costs and the work (assuming it’s of the same quality) is still worth $10k.
Assuming they have the skills and time to do the work themselves, homeowners can potentially save themselves from excessive expenditures for simple fixes and improvements. Of course, homeowners will have to consider whether they have the time and can afford the (hopefully) temporary inconvenience or can afford the cost of contractors. Keep in mind, if a contractor is not paid for their work, they may put a lien on the property until they have received the monies owed to them.
The Problem with Sweat Equity
As we have already mentioned, home improvement shows are all the rage, from flipping a rancher in El Paso to rebuilding a property in Atlanta, there is no shortage of entertainment around idiots flipping houses. There are even some Canadian shows meeting the trend. A word of caution, please don't think you can become a professional flipper because you watched some TV shows and it looks easy.
Sweat Equity is a great way to increase the value of your home, however for any real equity to be realized you would need to get an appraisal or sell your property. As appraisals are good for around 90 days, and housing prices fluctuate depending on your neighbourhood, there is no certainty that money and time in is going to equate to a positive return. Lets say your $10k investment goes towards laying a garage pad and you run out of money before actually building the garage, chances are your house value won't change at all.
As it relates to purchasing a home and completing renovations, the process to try and include sweat equity as part of the downpayment is tedious and the chances of finding a lender who will entertain even the idea is very slim.
If you would like to talk with a mortgage specialist about the best way for you to get into a fixer upper (or your dream home), feel free to contact us anytime!