By SA Ibrahim
I recently met Raf Howery for coffee and we got to discussing something I mentioned in my last blog: more and more home buyers are having to make significant improvements to their homes before they can move in.
Raf is the founder of Kukun (mykukun.com), a startup focusing on helping homeowners with improvements and lenders with data and analytics. We discussed how people increasingly want to live in urban areas with access to all the amenities and lifestyle. Some of the most desirable home locations do not offer the choice of vacant land, and an opportunity to build a custom new home. So, the only option is to buy an existing home and make major improvements. The solution often requires major remodels of the kitchen and bathrooms. In some cases, buyers totally demolish the existing dated home and build a brand-new one with modern features and finishes.
According to Raf, 61 percent of home buyers undertake a home-improvement project, spending an average of $33,000. Of course, there are some who spend a lot more. My wife and I undertook a massive home-improvement project in 2005, demolishing our vintage 1980s-era home down to the studs, rebuilding it to our specs. I can still feel the nail-biting stomach-punch of all the surprises, cost-overruns, time extensions and other challenges associated with such a project. My advice to anybody undertaking home-improvement is to do your homework and prepare to spend a lot more that you estimate. In this day and age, we have a great advantage with all the tools and information available online – so research and plan as much as you can.
From the lenders’ perspective, home improvements add complexity and risk. What if the home owners run out of money halfway through the project? The contractors might do shoddy work. There are many other factors that could strain the borrowers’ finances and increase the likelihood of a not making mortgage payments or compromise the value of the property.
Yet more home-buyers, including first-time home-buyers, are taking on home-improvement as part of their home purchase strategy. Lenders have the challenge of getting more sophisticated in evaluating the additional risk. Again, the data and analytics now available from startups like Kukun and others may be the place to start.
In my years of experience, new challenges frequently create new opportunities, and lenders who master this will have the competitive advantage to lend to future home buyers in a shrinking mortgage market – protecting or growing their business while others struggle or fail.