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Should You Do a Gut Rehab?

The process is expensive, time-consuming, and stressful. But, sometimes, the perfect answer.

Embarking on a gut rehab is not for the faint of heart. Experienced rehabber and real-estate agent Barb Van Stensel warns: "It's a labor of love. It can cause divorces." To give yourself the best shot at success, read this primer.

BUY A HOUSE: The first variable is the price of the property, since it only makes sense to rehab an old house if the cost is less than tearing it down and starting from scratch. (In the case of the Leavitt house, our three contractors estimated that it would cost between $350,000 and $500,000 to demolish it and build a new one on the existing foundation.) Van Stensel, an agent at Keller Williams realty who has rehabbed a number of properties in Chicago, recommends that buyers take the value of the land (which can be estimated by looking at what developers have paid for teardowns in the neighborhood) and add around $50,000 (a ballpark figure for the value of house's existing foundation and framework). Roger Thompson, an agent with Prudential Preferred Properties who is selling the house on Leavitt and happens to be in the process of rehabbing his own home, advises that buyers add the value of any items in the house that will not need replacing—a new furnace, for example.

But how does one decide which house is worth investing the time, money, and effort to rehab? Susan Abrams, a North Shore-based developer and contractor, looks for old homes with gorgeous exteriors and interesting structures. Van Stensel, on the other hand, has come across only one home that she did not think was worth rehabbing—its fatal flaw was a missing basement foundation. (The house on Leavitt falls somewhere in between these two extremes of rehabbing paradigms—while its aluminum-clad exterior is far from gorgeous, it certainly has more going for it than just its foundation, including its excellent location and relatively good bones.) Abrams cautions that working within an existing structure is more difficult than building a house from the ground up. Or, as Van Stensel puts it, "Anybody can build a house; very few can rehab."

FINANCE THE CONSTRUCTION: Those who plan to buy and immediately rehab a house will need a construction loan. It's possible to close on a mortgage and construction loan at the same time, but you have to be on the ball. Before closing on a construction loan, homeowners must present plans and specifications from a licensed architect along with a bid from a licensed contractor, according to Jim Jefferson and Jeff Lincoln, both from Chase Bank. (Those who are in the planning process with the end in sight can lock in an interest rate for up to 60 days until the plans are ready.) Typically, as with a mortgage, homebuyers will want to put at least 20 percent down on their construction loan in order to avoid paying for private mortgage insurance.

At Chase, underwriters use the following formula to determine the value of the home post-rehab: the fair market value of the site, plus 25 percent, plus construction costs. The site is also appraised based on the rehab plans, and the construction loan is based on the appraised value or the underwriter's formula, whichever is lower. In the first 12 months after the purchase of a home, construction loans are based on the price paid for it, but after 12 months they are based on the appraised value of the home. So, new homeowners with only enough cash for a down payment on a mortgage may opt to wait 12 months before seeking a construction loan in the hopes of using their equity in lieu of cash. While a home equity loan may be a great choice for smaller renovations, it is almost never an option for a project on the scale of a gut rehab where the construction costs can run to between 50 and 100 percent of the current value of the home.

MAKE A PLAN; GET A PERMIT: Once you have plans in hand, you or your contractor will have to obtain a permit from the city, which requires one for any renovation project that involves plumbing, electrical, or structural changes. If the project in question is a detached single-family home that will be owner occupied, the city does not require that the plans be drawn up by an architect. (For those who decide to go it alone, the Department of Buildings' neighborhood permit centers have a homeowner assistance program to guide DIY rehabbers through the permit process.) A permit can be issued in as few as 15 days but will be delayed if the plans are not up to city building code. Any new construction must adhere to current code, and any existing areas where work will be done must be brought up to code. The Department of Buildings inspects after certain construction benchmarks, and anything that does not adhere to code must be redone. With considerable time and money at stake, most people hire an architect, says the department's spokesman Bill McCaffrey—and, remember, you will need one anyway if you're applying for a construction loan. Permit fees vary widely depending on the project. Contractor John Casserly, of 41 North, estimates that a permit for a rehab of the house on Leavitt would cost around $2,500.

FIND A GOOD CONTRACTOR: For a complicated and expensive job like this, picking a good contractor is possibly your most important decision. Prudential's Roger Thompson recommends that homeowners begin by soliciting recommendations from friends and neighbors. Ask each contractor for at least three referrals, and interview former clients about how the contractor measured up in terms of delivering the project within the estimated time and budget. Chase construction loans allow the homeowner to pay interest only for up to 12 months during the construction period, so the ability to complete the project in a timely fashion is crucial. A blueprint of the project will allow your contractor to give an accurate bid; moreover, your builder should be able to lock in the price based on detailed plans. Finally, get at least three bids.

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Architect $3,000
Permit $2,500
Demolition: $3,000
Landscaping: $1,000
Masonry (repairs, tuckpointing): $1,000
Rough carpentry (dormers, framing): $32,000
Finish carpentry (trim/cab install): $5,800
Finish carpentry (material): $4,500
Cabinetry: $4,500
Countertops: $2,200
Roofing: $4,000
Siding: $5,700
Insulation: $3,500
Windows/patio doors: $7,000
Garage: $2,500
Hardware: included in finish material above
Interior doors: included in finish material above
Drywall (labor): $4,000
Drywall (material): $3,500
Tile (materials): $4,000
Tile (labor): $4,000
Hardwood flooring (material): $5,000
Hardwood flooring (install): $2,000
Carpeting: $1,500
Painting: $3,800
Mirrors/Glass: $500
Shower enclosures: $2,300
Medicine cabinets: $300
Toilet accessories: $250
Appliances: $4,000
Fireplaces: $1,000
Plumbing: $18,000
Water Service: $8,000
Plumbing Fixtures: $3,500
HVAC: $12,000
Electric (incl. low voltage): $19,000
Light fixtures: $1,000
Decks (front): $2,000
Dumpster service: $1,500
Construction cleaning: $500
Subtotal: $183,850
Miscellaneous: $5,516
General contractor fee (15%): $27,578
Total: $216,944

Gut (remove all drywall, interior walls, roof, and garage): $9,000
Landscaping: $5,000
Framing of new (walls, roof, garage, garage deck, and front porch): $25,000
Trim (all new interior 6 panel doors, 3 ½-inch base, crowned molding on first floor): $15,000
Trim labor (installation of all finished trim kitchen cabinets, and bathroom vanities): $12,000
Cabinets (maple cabinets for kitchen and three bathrooms): $8,000
Granite (kitchen tops and vanity tops): $5,000
Roofing and siding (new shingles on roof and new exterior siding): $23,000
Insulation: $4,300
Garage door: $2,300
Drywall (supply, taping, and installation for entire house): $12,000
Tile (supply and installation of marble in master bathroom, supply and installation of Jack and Jill ceramic tile in guest bath): $11,000
Hardwood floors (refinish exits, floors, and addition of some new floors): $8,000
Carpet (all bedrooms and basement): $6,000
Painting (one coat of primer and one coat of flat paint): $10,000
Shower glass and mirrors: $3,600
Appliances (GE stainless steel): $7,000
Plumbing (three new bathrooms, one powder room): $27,000
Sewer and water (a new sewer and water installation would be needed for new bathrooms): $12,500
HVAC (two furnaces, two AC units): $14,000
Electric (all new throughout): $20,000
Light fixtures: $3,000
Security (contacts on all exterior doors, glass brakes on first and second floor, motion detectors on all hallways): $15,000
Cleanup and dumpsters: $15,000
General contractor fee (15%): $43,755
Total: $335,455

Demolition, debris removal, and dumpsters: $12,000
Rough carpentry: includes labor and material for 660 sq. ft. addition and some first-floor wall reconfiguration: $28,000
Finish carpentry: includes interior doors, casing, baseboards, and installation of owner-provided cabinets: $14,000
Cabinets, tile, countertops, lighting and plumbing fixtures: $28,000
Roofing: includes main roof and porch roofs: $5,000
Siding and trim: $9,600
Insulation: $6,000
Windows (20 vinyl windows): $6,000
Drywall: $15,000
Bathroom finish work (tiling of 2 bathrooms and tile backer board. Installation of owner-provided fixtures and accessories): $8,000
Flooring (hardwood): $12,000
Painting: $6,000
Plumbing rough (includes new 1 ½" service): $22,000
Water service: $12,000
HVAC: $12,000
Electric rough (includes new 200 amp service): $15,000
Front and rear porches: $9,000
Gutters and downspouts: $2,200
Basement build-out (includes bathroom, carpet, drywall, trim, and paint): $24,000
Total cost: $245,800

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