One of the more interesting books I read a while back was about advertising. One of the insights I got from that book is a very simple premise for the ads that you see on TV or in print. When a company sells you a product they are not selling you on the features or utility of their product in your every day life. They are speaking to your fantasies about that person that you dream to be and how their product will be part of that fantasy.

Remember that awesome Volkswagen commercial about the kid in the Darth Vader costume trying to use the force to start the car? The commercial did not appeal to your need to get from point A to point B in safety and style. It appealed to your fantasies of an awesome family life where you have a kid that you can play mind games with.

The same goes with Heineken’s commercial with James Bond. Seriously, do you expect to be a super spy if you drink mediocre beer? No, but you can put yourself in a tux and quaff a mediocre beer like a secret agent. If you’re a single girl in D.C. you will have met one of those guys at a bar who tells you that he can’t talk to you about his job. I can bet he’s drinking a Heineken.

So the fantasies of me as a savvy real estate investor and super duper handy man has crashed into the realities of financing and local zoning laws. The financing part is kinda tricky. Here are some fictional numbers to walk through the financing maze. Let’s say I purchased my fixer upper for $300k and financed $240k. Let’s say that fully renovated homes in the area are assessed at $450k. I need a construction loan, which will finance 80% of the assessed value of the property after renovations. The lender will take a look at the proposed plan from the contractor to do the assessment. Any difference between the lender’s assessment and the contractor’s cost has to be made up in cash from my threadbare pockets. So assuming that all this is correct then if the renovations will end up with a home worth $450k, the lender will provide $360k in total financing, of which $240k would be used to pay off the existing note and $120k available for renovation needs.

I hope you can see some of the pitfalls of doing this. If the renovation cost exceeds that $120k the remainder comes out of pocket. If the plans still cost $120k but the lender determines that the assessed value will be $420k, then I only have $96k in financing available for renovations ($420k x 80% =  $336k.  Less $240k on the existing loan leaves me with $96k). In this scenario, I would have to cough up $24k in cash to make up the difference. I can alter some of the renovation plans but that may decrease the assessed value which will reduce the financing available and thus create a death spiral.

The other dose of really is the local zoning laws. I had some elaborate long term plans for the basement. It involves adding an egress door, knocking down a dividing wall, building a second bathroom, adding a directed vent gas fireplace and built in bookcases and entertainment center. All that came to a crashing halt after a  simple tape measurement.

The distance between the concrete flooring and the bottom joist in the unfinished part of the basement is 82 inches. The distance between the carpet and the finished ceiling is 80 inches. The minimum distance between the floor and finished ceiling for the basement to be a legal livable space is 84 inches. So my basement as it currently stands cannot legally have a bathroom nor can I finish it the way I plan to.

At this point, I was ready to do some of the demolition right then and there by banging my head into the drywall.

After I did some research and calling around I found out that dropping the basement floor by 4″will cost anywhere from $10-20k. This involves shoring up the joists, adding footings, and a whole assortment of other engineering marvels. So the big question is what do I have to give up in this round of renovations to drop the floor and put in the roughings for the bathroom? And how much out of pocket cash will this cost me? If this job optimistically costs $20k, will it add only $10k in assessed value, meaning the bank will finance only $8k?

So yeah, you can see how all this financing thing is looking to be a bigger crap shoot than expected. My winnings history at the casino is a little spotty so I am a little nervous. The only bright spot is that I caught a discrepancy between the recorded square footage with the local tax assessment office and my appraisal. The tax office has recorded the livable space as 962 sq ft but the appraisal had it at 864 sq ft. After a phone call and a few measurements the city will reduce the taxable square footage applied against my taxes. It won’t be a lot but I’ll take anything that I can get.

The past month has also been spent going back and forth with my contractor over the plans. It has been an exercise in patience for him. I’ve been sending him a number of different options as my thinking has evolved due to budget constraints and design ideas. I should have the first set of renovation options from him in the next week or so. Once I make a decision, it will go to the lender and appraiser and then I find out how much financing I get. Here’s to hoping that I pull an inside straight flush on the river!

Now where’s my Heineken?