I own a 2 bedroom/1 bath house that is worth $220K, which is also what I owe on it. I had a friend who is a licensed appraiser do an appraisal on the home as it is now (which gave me the value of $220K), and had him also do an "as completed" appraisal based on plans I had drawn up for converting the attached one car garage to a master suite, which would add 250 SF of living space and bring it to a 3 bedroom/2 bath. The as completed value came in at $280K. I considered doing a 203K in order to finance this and it would have cost about $40K to have a contractor do it and to get the loan. I'd end up with some equity, but not much.
On the other hand, doing the work myself, (I did construction work for a long time but am not licensed, plus 203K does not allow licensed contractors to work on their own homes anyway) I spec'ed out the materials and I can do it for $10K. So the question is, if I were to charge $10K in materials at Lowes and just pay the minimums during construction, and then refinance, would I be able to tap the $45K or so in equity (after rolling in closing costs) in order to pay off the Lowes card? If not, the alternative would be to put it on the market, but the whole reason for coming up with this plan was to stay in the home because we like the neighborhood, the schools, etc...
1) If you choose to do the work youself - make sure you do it WITH PERMITS and get a c/o on the completion. Otherwise there will be no additional equity and there will be a 'cost to cure' if you have put in the improvements without proper permits. How do I know this? As a Realtor I see it all the time especially with garage conversions to living space. In our area we do have the ability to add improvements as 'owner builder' and that is acceptable for permits. Check into that process in your area.
In NJ homeowners are permitted to pull permits and do all work themselves, provided of course that it meets code. I've already contacted the local inspector, shown him the drawings, and he's on board. I should add that I will be working with a licensed electrican and plumber-they are both friends of mine and will be handling the highly technical parts, coming by at night after work/on weekends. I'll still pull the electrical and plumbing permits myself, but they'll be guiding me along the way, free of charge.
2) Don't over improve for the neighborhood unless you are going to stay there a long time and desire the 'over improvements'.
That would be hard to do. We are nearly the only 2 bed/1 bath in the neighborhood. My appraiser buddy had to search far and wide for comps to establish the current value. Most of the homes in the neighborhood are at least 3 bed/2 bath (lots of 4 bed/2 baths too), and most of those don't have garages either, so if anything, we'll be bringing the house more inline with the rest of the neighborhood. However, we do plan to stay long term provided we can make this work. We have two kids, so the extra bedroom and bathroom would really make the house comfortable for the long term.
Great - you have it covered! 