Darlene and Drew: House Remodeling Case

Darlene and Drew: House Remodeling Case

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Darlene and Drew have run out of space in their two bedroom, one and a half bath, finished basement home, and they must decided what to do because Darlene is pregnant with their second child.

Eight years ago the couple bought a modest house on School Street in an urban residential neighborhood. At that time, Darlene was pregnant with their first child, John. They moved from their tiny, typical new bride and groom, apartment.

At first Darlene and Drew tried to figure out how they might accommodate the new baby in the existing house. Could John share his room with the baby? They knew he would quickly grow tired of this arrangement. Could they divide their own bedroom? This seemed to be a temporary solution, but they wanted a permanent one. Anyway their bedroom was already over crowded. They quickly came to see that they would not be able to do with the space they had.

They decided to add on to the house. For the past two months, they had been reviewing and pricing their renovation options. A bedroom off the end of their one story house would cost $25,000 and would take away a huge chunk of the back yard. Adding a second story would save the yard but cost $40,000.

Having bought the house when they did, the have reaped the benefits of a doubling in prices in the local real estate market over the past years. A close friend and realtor told them that their house would sell now for $155,000, which was a pretty good deal since they only paid $77,750 for the house when they purchased it. They had a remaining mortgage of $57,000 which resulted in an equity of $98,000. Their job situations were stable. Darlene worked full time as a nurse in a local hospital, though she plans to work only part time for a couple of years after the baby is born. Drew works as a salesman and has a secure, solid joy. Their joint income before taxes is about $75,000 per year. They feel confident they can afford the renovation. They could, in fact, use the equity in their house to finance it and they feel confident they can meet the monthly payments.

One evening after dinner as they are putting away the dishes, Darlene recounts a conversation that she and John, their eight-year old son, had earlier in the day. "Drew" she began, "John really got me thinking today. You know Jimmy, his friend down the block? Well, Jimmy's family is going to move, so John asked me why people move and when were we going to move? At first I thought he was apprehensive that we might move. But he was actually excited about the possibility. We had a long conversation about why people move, and the more we talked, the more I thought. Why don't we consider moving?"

Drew's response was predictable. "Are you serious? Move in today's market?"

Darlene

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