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Are You Wasting Money on Upgrades in your New Mueller Home?

Once you’ve signed a contract to build a new Mueller home, the next steps can be a daunting experience for some, or a fantastic opportunity for others.

The two most common questions that I am asked by clients I represent are:

  • Should I do xyz upgrade?
  • Should I do xyz upgrade after closing or with the builder?

Many people don’t want to spend money on upgrades that won’t increase their home value, so I’m going to cover:

  1. A quick overview of the builder upgrade model
  2. Which are the most common upgrades to consider
  3. Guidelines on what upgrades are cost effective
  4. Pros and cons of builder upgrades
  5. A case study with numbers

Some buyers love specifying everything to the finest detail – every surface of every wall – the width and color of tile grout lines, the finish of the switch covers, the design of the kitchen back splash, and the location of every extra electrical outlet. Some buyers just see a house as an investment and just want things that will make it easy for them to sell when they decide to move (remember that you have to owner-occupy your new Mueller house for the first year, and can’t just flip the home after closing, or indeed the contract before closing – that’s in the covenants).

I’m going to focus on the production builder process here – custom homes are a different kettle of fish entirely. The production builders have design centers staffed with people who can help you through the specification process – adhering to a budget, meeting your aesthetic requirements and helping you make sensible decisions if making sensible design decisions is not your forte. So for the group of people who fall into the “this is all too much detail, just give me a house that looks like the model” camp, they can do all the heavy lifting when it comes to choosing the faucet in the guest bathroom for you. And for the people who have been eagerly collecting home magazine clippings and critically evaluating every friends’ kitchen remodel for the last 5 years, the designers can happily accommodate your need to explore and refine.

The process generally goes something like this. Your big ticket items are typically flooring upgrades. Then choosing a kitchen counter surface dictates how the rest of the kitchen comes together, and then once you’ve knocked out the kitchen it’s onto the master bedroom and beyond. There’s a good reason for this order. It lets you focus first on the big items that most people find important. And also where the largest chunks of budget get spent.

You might be surprised after walking from the model home into the depths of the small print on your sales contract to see that you don’t get the distressed wide plank Brazilian teak wood floors as standard, and that your home is outfitted with carpet in more places than you’d like. So, do you get tile, laminate, marmoleum or wood floors? Before I give a sweeping, blanket opinion on that I’ll take a diversion into what you’re doing this for.

Why upgrade the house at all? Surely from a financial perspective, it’s better to be the cheaper home in Mueller (being dragged along with potential increases in median price) than being at risk of over-improving your home and making it hard for a later appraiser to see the value you’ve added? The deeply cynical core of me would have agreed five years ago – but not so much now. The buyer of a certain price point home in the neighborhood seeing several different homes will come to expect certain upgrades. The visually stunning home with the wood flooring and attention to detail on surround sound and crown molding is certainly demanding a premium right now.

For me, if I go and look at a set of homes with another real estate agent, we’ll notice things like the type of tub in the master bathroom, and any upgrades to crown molding and ceiling fans. But what they tell you at the design center is quite evident if you look at homes with regular buyers. Buyers typically like to see upgraded flooring (it’s large, it’s obvious and it sets the tone of a room), and they like the kitchen and master bathroom upgrades most. I’m not trying to say that the buyer is not aware of other things, or to pejoratively describe the average buyer, just to say that there are certain areas that attract and retain buyer attention and some that are more for a subset of buyers.

Also, most people like to shape their homes for their own needs, not the needs of the future buyers of their home. Some people don’t want (softer than they seem) hard wood floors as they have large dogs, sharp children or they don’t like the engineered wood flooring manufacturing life cycle. They want everything just so forthemselves to enjoy, and they aren’t concerned about the expense. They upgrade as it makes them happy. Fair enough.

Our environment, the world in which we live and work, is a mirror of our attitudes and expectations – Earl Nightingale

So upgrades then, are a good and necessary thing, not just a profit center for the builder (the way the Cynical Garreth used to think until the dozens of Mueller resale homes showed me otherwise). Sure, you could argue that the builders will under specify a few areas that they know most people will want, but I give them a break these days. Not everyone likes the same thing, and there are certainly cycles of home finish fashions and wildly different styles.

mueller_home_style

Houzz.com and their app is great for browsing styles and ideas

So then there are questions about particular upgrades – should you choose the natural or man made counters – silestone or granite for example? Personally I like silestone. It’s tough, it appeals to my contemporary aesthetic, it doesn’t show scratches or need much maintenance. So why did I elect for granite counter tops when given a similar priced choice in two recent homes? For me, I’d just read the chapter in Freakonomics about real estate advertising (well it’s actually about the author’s lack of trust of real estate agents, which is well deserved). It says that the term “granite” correlates well with higher sales prices. Which stands my own personal sanity test – I’ve met more Mueller buyers who dislike silestone than I have buyers who are tired of granite. And that fact motivates me more than the desire to have a kitchen that is uniquely for me and my family.

The typical economics of upgrades don’t always apply. If you look at the large home improvement store funded surveys about how much value a certain upgrade does to the resale value of your home, then you might see that upgrades in general rarely give more money back than they cost, unless you’re doing the project with your own labor – the fabled sweat equity myth that perpetuates among optimistic first time home buyers.

Whereas if you’re looking at upgrades in a new home, there is no chance for sweat equity – you’re paying retail for the work, maybe a touch more. But, you’re getting it warrantied, and you’re paying for an experienced general contractor to facilitate and oversee the work. And if you’re doing the kind of upgrade that brings the home to a level that buyers expect, then you’re making your job at resale easier. Or as a past client of mine said, I’m making your [the future listing agent] job easier.

Surely this is a real estate agent encouraging you to spend more money to make their job selling your house in five years time more simple? I hear the cynical reader cry. Not so.

Here’s an example from summer 2012.

At the start of 2011, a client contacted me about building a new David Weekley home. They then proceeded to put more upgrades into the home than any other client I’ve ever seen in Mueller (except a few custom homes – different kettle of fish again). Their plan was to stay firmly rooted at Mueller for 7+ years and to make the house everything they’d ever wanted with a protracted stint at the design center. The home was beautiful when completed – they had a great eye, and it didn’t seem that budget was a strong factor in their choices.

Sure enough, ten months later they unexpectedly needed to relocate and sell the dream home. The part of me that thinks about the new car rolling off the lot and losing up to 20% of its value was a little panicked, but lo and behold, the second client who saw the home wanted to buy it. Was the sales price lower than the original sales price, reflecting a less than equal payback for the upgrades they’d put infor their own pleasure? No, the listing price was higher than the sales price the original buyer had spent less than a year before, and I didn’t even have time to market it outside of my personal buyer network. There a few more details in the story, and certainly the market was in chronic short supply, but the essence of the story is that upgrades can and do pay back.

So the next part of the riddle: should you do it after closing or with the builder?

The advantages of doing it with the builder:

  • The cost is rolled into the mortgage if you’re buying with a loan. Looking at a 3.75% loan rate, the difference in monthly mortgage payment between a $400,000 loan and a $410,000 loan is $46 (principle and interest only). So it costs $4.60 per month per $1,000 of upgrades. I know, it compounds and there are different opinions on debt, but it’s a metric. Compare $55 a month to coming up with $12,000 in cash – there may be value to borrowing at the prevailing mortgage rate to do the work.
  • It’s warrantied by the builder. It has to pass their quality control, and yours, and if it’s not right, they have to get it fixed before closing
  • It’s completed before closing. It sounds kind of obvious, but scheduling contractors and getting jobs finished just before you move in can be stressful
  • You get the help of a designer to make sure everything coordinates. I’m not exactly sure how designers are compensated – I know that they have always been respectful of budgets in the past in my experiences – but they do this all day every day, and they politely tell you when you’re making something ugly happen.
  • Some items have dependencies that the builder can manage. For example the builder can put the baseboards on after the flooring so that they are at the right height first time around. If you replace carpet with wood floors after closing, the baseboards can be in the wrong spot
  • You don’t waste materials as much. For example, if you have to rip out a builder light fitting to put in your own after closing, you have a spare builder light fitting you might not need. If you do the removal in the builder’s project management system, you get a credit for the light fitting that was never installed, and you don’t have extra materials.
MuellerWoodFlooring

You have to wait until after closing for this

The advantages of doing it after closing:

  • You can do things that the builder won’t or doesn’t offer – chose different materials, supervise everything yourself if you want to. Having something out of the norm can help differentiate your home – both when you’re living there, and when it comes to sell.
  • It might be cheaper. Certainly you can do things yourself. I know I’ll never try to lay tile again after trying once. But even if you hire a subcontractor to do the work and buy the materials yourself, you may end up saving money. Of course, you might not. Imagine that you ask the builder to install the least expensive flooring as you plan to add solid wood floors. (You have to have some flooring to get a loan and so forth). The builder installs sheet vinyl so that you can close on the home. You are then wasting money (and resources) on vinyl flooring that you don’t need.
  • You can control timing. This is less of an inconvenience for some than others. For example, some elect to have builder grade carpet for several years while they choose the wood flooring of their dreams, or custom architectural steel trellises built. Also you don’t have to decide and choose everything at once. Or pay for it all at once.

For many, the timing and practicality of moving their family prohibits doing major work after closing – for some, the thrill of doing it themselves and saving some money is a big plus. Keeping the upgrades to within a reasonable proportion of the base house price means that you’ll do well economically too.

To round off this lengthy discourse on Mueller builder upgrades, I’ll say one thing. There are some checks and balances – the builder will start to dig a little deeper if they see you’ve gone berserk at the design center for two reasons:

  1. If you back out, they have to sell the home to someone else. They mitigate that risk by charging you an additional upfront fee if you spend over a certain amount at the design center. Don’t be alarmed that you’ve put something too funky in there – this is standard practice.
  2. If you’re buying with a loan, the home will have to be assessed by an independent appraiser to make sure it’s worth the adjusted sales price.

If I had one piece of advice for those contemplating 4-7 hours of design center time, it would be to remember to set a reasonable budget and to iterate to get close to it. Oh, and have fun in the process.

Contact a Mueller real estate veteran if you have questions about buying and upgrading a new home at Mueller – we bring all our wealth of experience to the home buying process at no cost to you. 512 215 4785

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