Archive for the ‘financing’ Category

Tax credit folly?

Sunday, July 18th, 2010
Written by Marcus de la fleur

We stepped deep into window research, but we still have to make a decision on what windows to use. Because they will be a very big investment, any type of rebates, financial incentives or tax credits will influence this decision.

Federal Tax Credits for Consumer Energy Efficiency

… or, more commonly known as the $1,500 tax credit that expires on December 31, 2010.

The total of $1,500 can be applied across a range of energy efficient upgrades, such as furnaces, water heaters, insulation, doors and – yes – windows. This made us very happy as we were convinced that we could claim the $1,500 in a heartbeat on our new windows … until I looked at the fine print.

Qualifying windows must have a U-value of 0.30 [LINK] and Solar Heat Gain Coefficient (SHGC) of 0.30 (see also ‘The world of windows’ post).

This is a federal tax credit, available nationwide, from Alaska to Florida and Southern California to Maine, intended to stimulate the economy and improve the energy efficiency of existing homes.

Now, wait a minute, how can that energy efficiency thing work with this one requirement (U-value of 0.30 and SHGC of 0.30) across a number of different climate zones? Down south, a very low SHGC is probably of interest while the U-value would not matter that greatly. It would be the reverse up north, where the insulation value (U-value) counts and passive solar heat gain (high SHGC) may actually be desirable.

Take our house in Chicago. I ran a quick window analysis for the 1st and 2nd floor with the RESFEN model. The only variable in the analysis was the SHGC.

  • Scenario 1: SHGC north 0.25, east 0.25, south 0.25, west 0.25
  • Scenario 2: SHGC north 0.51, east 0.51, south 0.51, west 0.25

Allowing for passive solar heat gain (high SHGC) through the windows on the east and south side could bring the annual heating load down as much as 10%, even though our building has a north-south orientation. The more a building has access to passive solar, i.e. lots of windows in the south elevation, the greater the potential to lower the annual heating load.

That said, any window slated for passive solar heat gain (high SHGC) would need proper summer shading or otherwise the winter heating savings may be lost in summer cooling needs.

Even the Energy Star program recognized the importance of the different climate zones and has structured the qualifying criteria for windows, doors and skylights accordingly.

Why the federal tax credit for consumer energy efficiency did not take the same approach is a mystery to me. I guess the intent is good but the execution is poor.

As for the $1,500 – we may not claim it on the windows alone, because we would like to benefit from passive solar heat gain. But we have the boiler, insulation and doors that will help us to claim the full amount.

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Interpreting ball park estimates

Saturday, May 16th, 2009
Written by Marcus de la fleur

First, let’s look at some basic project budget principles: The total loan amount cannot exceed the projected appraised value of the property, once the renovations are complete. That appraisal takes into account all of our planned improvements to the house (see also 04/12/2009 post) and came in at $280,000.

If we subtract the purchasing price of $60,000, we are left with $220,000, which is the maximum amount that our bank (ShoreBank) would lend us for the green rehab.

Cathy and I feel that $220,000 for the rehab is more than we want to take on right now. We went through our personal finances with a fine tooth comb, looked at various mortgage scenarios, estimated monthly payments, and decided that we can manage a rehab loan amount of $160,000 right now.

This $160,000 is one piece of the puzzle. I now have to get the other piece – what that $160,000 is actually buying us. We have a number of ball park estimates from contractors and vendors (see also 05/13/2009 post), which are all very conservative, because of the limited information I could provide at the time I requested the information.

How would I know that these estimates are conservative? By talking to friends, industry contacts and other homeowners who actually had, for example, a base board heating system installed. Their project may be different from ours, but the aggregate pricing information gives us the clues.

scope-and-pricing

In short, our project budget (see also: 3141 ball park project budget) is based our interpretation of the conservative estimates we received. It is a product of our combined guesstimates, leaving a lot of questions unanswered, such as how the work we plan to complete ourselves impacts the budget.

We hope to completely rehab the basement and 1st floor for the $160,000. What can we really get for that money? Your guess is as good as ours, and you can witness this unfolding over the next few months on this blog.

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Cost shock management – developing a budget

Wednesday, May 13th, 2009
Written by Marcus de la fleur

In order to develop a somewhat reliable project budget, we need a real property, which we now have (finally). I mentioned in the 04/12/2009 post our efforts to put a rehab budget together. Let’s look at this process in some more detail.

  1. Fact: Our total loan amount for the sustainable project includes the purchase price of the property plus the money for the green rehab.
  2. To pursue any meaningful budget exercise, we needed a basic plan for our green rehab ideas. Our project principles and rationales provided that framework.
  3. We shared this information with vendors and contractors and arranged for meetings at the property to discuss the project, its various components and the associated work in more detail.
  4. After we shared this basic information with vendors and contractors, we solicited initial ballpark estimates. These estimates became the foundation for our rehab budget.

The tricky part in all this is that we have no final design or engineering. In other words, some of our assumptions may have to change down the road. Those are the same assumptions on which the contractors and vendors based their estimates, which we in turn used to as the foundation for the budget development. Sounds like a house of cards, doesn’t it?

Why would some assumptions change? Well, this is an old house, and we don’t have a full inventory of the building. Electrical, plumbing and heating will most likely need to be completely rebuilt. But we can’t look into the walls to see what other problems, if any, are lurking there waiting to be discovered – such as structural damage (God forbid).

I owe an apology to all vendors and contractors that were kind enough to issue their estimates. I did to them what I do not like having done to myself in my capacity as a landscape architect. And that is to answer the question of “what does the project cost,” based on very little research and very vague parameters. You typically can’t win in these situations, and risk an unhappy client because the budget will change with every piece of new information that rolls in.

The contractors and vendors have my sympathy and my gratitude for working with the limited information I had at the time.  The exercise wasn’t fruitless because we got to meet and talk about the project. The vendors and contractors extracted more details on our plans and expectations, while we were able to evaluate a potential working relationship.

I don’t plan to hold the vendors and contractors to their estimates, but use the numbers to the development of the initial project budget – something that I still need to complete.

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Who will finance a foreclosure purchase?

Friday, April 3rd, 2009
Written by Marcus de la fleur

We kept monitoring a number of foreclosures we earmarked – and witnessed the price tumble over time. I distinctly remember a beautiful large, sturdy, gray stone six flat, gutted on the inside, listed for $140,000. Imaging, that is $23,350 per unit! Very tempting, but too large of a building for us – we are first time buyers after all. The last time I checked the price was down to $75,000.

These buildings are on the market for very little money, but no one buys them. How can that be? Even if they need a lot of work, they are still a steal. Well, it’s not only the tons of tender loving care they need (see also 04/02/2009 posting), they are basically uninhabitable in their current condition.

Banks and mortgage lenders got very picky. They like to see a good credit history and a juicy down payment. The other thing they require is a property to be inhabitable before they finance the purchase. Inhabitable is defined as the property having a functioning bathroom and kitchen with running water and electricity. We looked at about 25 vacant foreclosures and none of them met that requirement.

We heard wild tales of buyers investing several hundred or even a thousand dollars into a property prior to closing, fixing up the bathroom and kitchen so they could secure financing. And even then there was no guarantee that the deal would go through. Too much of a déjà vu for us after our recent attempts to purchase a vacant city lot.

And honestly, not inhabitable is good for us, as we will remodel everything green anyway. Except – how are we going to finance the purchase and the rehab? I heard on National Public Radio that a lot of foreclosures are bought for cash. That is fine if you’re a builder with a cash flow, or if the property requires no major work. But that is not our world.

The solution to our problem fell into our lap during a beat meeting. Two representatives from a local community bank, ShoreBank, attended the meeting to spread the word about their Rescue Loan Program for homeowners at risk of foreclosure. We’d researched and talked with a lot of lenders, but ShoreBank was new to us.

A brief conversation after the beat meeting led to an appointment in which we learned about ShoreBank’s Rehabber Loans program. The bank’s mission is to invest in communities on Chicago’s South and West Sides, provide financing to improve housing stock, increase home ownership and offer special products for first time buyers.

Bingo! ShoreBank’s product appears to be a perfect match for our purchasing and rehab plans! The interest rate on the rehab loan seems a little higher than on other conventional mortgages, but at least ShoreBank is willing and interested in investing in the rehab, even if the subject property is uninhabitable as it is now.

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