The nest egg of equity: Homebuyers who push limit on what they can afford may reap solid payoff later

For most Americans, the biggest investment they make in their lifetimes is buying the place they call home.

Except for only a few historical exceptions, the value of a standard home only increases over time. That’s why longtime Realtor Rob Higgins always coaches those shopping for houses to buy as much home as they can afford so they can eventually take advantage of its value or equity.

“Even if you have to do some work on them, having a home will pay off in the long run,” said Higgins, who is the executive vice president of the Spokane Association of Realtors. “Reach as far as you can. Live like a pauper if you can. In 10 years, you will turn around and say, ‘Man, I’m glad I did that.’ ”

While it sounds obvious, simply paying the mortgage on time begins the process to equity growth, said Greg Deckard, chairman and CEO of State Bank Northwest.

Otherwise, homeowners can do a number of things to build equity faster. One is paying just a bit more every month, such as rounding up the mortgage payment a couple hundred dollars, he said. Every little bit pays the house off faster, which reduces the amount of interest paid over the life of the mortgage.

“One of the tried and true ways is to refinance your house to the lowest rate you can,” Deckard said. “If you make two-half payments a month, the mortgage goes down faster.”

The other no-brainer advice Deckard had was to make sure the house stays in good working order.

“Obviously, keep it in good condition and show a pride of ownership,” he said.

Michelle Mendez, the director of operations for the Lee Arnold Team, which specializes in selling fixer-uppers, agreed. She said the main value of the home is tied to the big-ticket items, especially when it comes time to sell.

“Make sure the roof and (heating, ventilation and air conditioning) system is good, and not any problems with the plumbing,” Mendez said. “Those are the things I would really worry about because paint and carpet are really easy to fix down the road.”

Bryan Crabbe, with Five Star Real Estate Group, said some sellers clean the carpet, splash some fresh paint on the walls and call it good.

“That’s all well and good,” he said. “The best projects I’ve seen are those people who put a little more effort into it. They fix everything to the nth degree … so the next buyer doesn’t have to fix something.”

The difference in selling price could be everything from an offer below list price to a bidding war, he said.

“Everybody knows that kitchens and bathrooms really are what sells a house,” Crabbe said. “Make sure they are in good condition. Comfortable is a very big part, too. Make sure the yard is presentable so the next buyer can come along and see the value in what they are buying.”

Homeowners looking for major upgrades to an existing home will find difficulty finding available contractors, who are stretched thin during the current housing boom, he said.

“Everybody has a budget. Their budget doesn’t expand generally as much as the housing market is at the moment,” he said. “Income doesn’t rise 10% or more a year. But, housing is outpacing that because of the lack of inventory.”

Mendez said one of the advantages of buying an older home is that homeowners get a chance to reshape it in their image.

“You can make that house the home you dreamed of versus moving into someone else’s dream,” she said. “Yeah, new construction is fantastic. But I think the older homes have better bones.”

Joel White, executive director of the Spokane Home Builders Association, agreed with Mendez that communities like Spokane have vast untapped potential with many older, existing homes.

“I see that as a big future of Spokane, which has an aging housing stock,” he said. “As housing prices go up, you will see investors and private individuals upgrading their homes. Certain pockets will struggle. But as owners take pride in their neighborhood and start to rebuild, that’s going to be a real positive.

White saw that transformation in downtown Vancouver, Washington, when he lived there. People tired of living in Portland began investing in older homes in Vancouver and reshaped it.

“You hit momentum in your neighborhood when a lot of people are doing it,” he said. In Vancouver “it was a dynamic improvement to a downtrodden area.”

With home values in Spokane seeing percentage increases in the double digits, existing homeowners have seen home values skyrocket. David Flood, chief loan officer for STCU, cautioned homeowners about trying to cash in on the boom.

“Just because you have equity, I wouldn’t say go use it,” Flood said. “Prices do drop. I’d say be smart about it.”

Deckard, of State Bank Northwest, agreed.

“Take good care of it. Don’t use the equity in your home to pay off personal expenses, like vacations,” he said. “Don’t put a car on it or other personal expenses. That’s a lien against your house. That will reduce your equity.”

That said, the only way for anyone to cash in on the value built up in their home is to sell it, or borrow against it.

For homeowners that sell, “You still have to buy something in this hot market, too,” Deckard said.

Still, Higgins, a former member of the Spokane City Council, said that record housing prices are adding wealth to homeowners who were willing and able to survive those early days of scrounging to pay the mortgage.

“It’s not the best financial investment. You can do better investing in other things,” Higgins said. “But, you are going to need a place to live. So, get that house, even if it is a fixer-upper. For most of middle America, that’s their nest egg.”