‘Sweat Equity’ a Way to Cut Housing Cost : Using Imagination, Muscle Often Shaves Price of Dwellings

Many would-be home buyers, undaunted by skyrocketing prices and too little savings, are taking unusual steps to bridge the affordability gap and purchase their first home.

Some buyers, long on ambition but short of cash, substitute their own sweat for money by helping to build their own house or by buying fixer-uppers. Others hook up with moneyed partners and, through a simple “equity-sharing” agreement, buy a home and eventually resell for enough money to purchase a place of their own.

Others hunt for bargains in foreclosures or at auctions. And some savvy buyers with more street smarts than cash can structure deals that require little or no money down.

“Where there’s a will, there’s a way,” says Monte Helme, spokesman for real estate giant Century 21. “You just have to want your own home bad enough.”

Just ask Kathy Kenny.

Five years ago, Kenny, 46, had no house, little credit and just a few thousand dollars in savings. But later this year, she’ll move into her own custom home overlooking the Santa Monica Mountains in Topanga that she built from scratch for less than $25,000.

“I was basically broke when I started,” remembers Kenny. “But I wanted a place to call ‘home,’ and I was willing to work in order to get it.”

So-called “sweat-equity” projects--where buyers swap their own labor for cash--take a variety of forms. They can be as simple as buying a run-down house and fixing it up, or as complex as designing and building a brand-new home.

The only requirement is a relatively small amount of cash--sometimes as little as a few thousand dollars--and a willingness to get hands dirty.

Difficult Site

“Building a house or doing your own repair work isn’t really that difficult,” says Chuck Smith-Kim, a spokesman for Owner Builder Center, a school for do-it-yourselfers in Berkeley. “And let’s face it: Most middle-income families can’t afford to buy an existing house in perfect condition unless it’s way out in the sticks.”

Kenny’s build-it-yourself project took longer than most because the home is on a difficult site and she didn’t have the money to hire skilled tradesmen or a general contractor to oversee the work.

Her only knowledge about construction was gleaned from a book she read in 1981 and a monthlong Owner Builder course she took two years later that teaches people how to build their own home.

Ironically, Kenny’s toughest job hasn’t been the actual building of the house: It was the three years and $4,000 she spent convincing county geologists that her home wouldn’t be subject to landslides.

“I finally got my building permit in May, ‘86,” she says. “The actual construction has been fun--and not nearly as frustrating.”

‘I’m Not Selling’

By the time her home is completed this fall, Kenny figures she and a handful of friends and relatives will have spent about 3,700 hours on the project. Hired help has been limited to private geologists, a structural engineer and a few day workers who helped dig the foundation.

Between $20,000 and $25,000 will have been spent for the land, building material and paid workers. When the job is done, Kenny says, the house “would probably sell for $200,000. But I’m not selling--I’m staying put.”

Although Kenny has spent more time on her house than most people are willing to spend, she does have one important advantage most others do not: A part-time job and modest income from sales of a book she wrote several years ago have provided enough cash to meet construction costs and maintain a spartan life style.

Many married couples can’t get by on part-time pay--especially if they have children--so building their own home usually means working 40 hours during the week and spending weekends hammering nails or pouring concrete.

“Let me tell you, it’s not easy,” says Oscar Tovar, who lives in a Santa Ana condominium complex that he and several others built through a sweat-equity program. “The work is hard, but it’s worth it to own your own home.”

Condominium Project

The program Tovar, his wife and 19 other couples participated in was organized by Santa Ana-based Civic Center Barrio Housing Corp. and is typical of housing programs run by nonprofit agencies.

Tovar and his wife, Viola, agreed to work a total of 40 hours a week building a condominium complex on Raitt Street. In exchange, the Tovars could buy one of the finished units for $62,000, with a down payment of $3,500.

If the Tovars had walked off the street and tried to buy an identical unit in the same neighborhood, it would have cost about $100,000 and required a down payment of $10,000 or $20,000.

Each family received basic instruction in carpentry from two experts hired by the nonprofit sponsor. Tasks requiring more advanced skills were performed by subcontractors.

Time on the Project

For a year, the Tovars typically spent between 8 and 12 hours each Saturday and Sunday working on the project. During the week, Oscar would often spend the day on his job as a meat cutter in Buena Park, and then put in another three or four hours at the project while Viola stayed in their apartment and watched their two children.

Working so closely with a spouse and several strangers can be emotionally taxing. “Your nerves can get a little frayed when you’re tired, and then you have to go home with the same person you worked with all day,” Tovar says.

“And then there are always a few people who don’t want to do their share of the work.”

To bring shirkers back in line, the group voted to deduct 50 hours from the accumulated time of anyone caught cheating. The threat worked: The penalty was never applied.

In addition to Civic Center Barrio Housing Corp., other nonprofits that run sweat-equity housing programs include Self-Help Enterprises in Visalia; Peoples Self-Help Housing, San Luis Obispo, and Neighborhood Housing Services of La Habra. Others can be found through local housing agencies and the state Department of Housing and Community Development in Sacramento.

Middle-Income Alternate

Waiting lists to participate in such programs are often long, and some people refuse to take part simply because they don’t like the areas where many of the projects are located. And, since most nonprofits gear their housing programs toward low- and moderate-income families, people who make more than $20,000 or $30,000 a year usually can’t qualify.

As an alternative, some middle-income people hire a contractor to build the shell of a house, and then do most or all of the interior work themselves. Savings can range from about $5,000 if the owner simply does the painting and other minor tasks to $20,000 or $30,000 if he installs cabinets, faucets, tile and the like.

As a general rule, it costs between $50 and $60 a square foot to build a completed house in California, says Smith-Kim at the Owner Builder Center. That doesn’t include the cost of the land.

People willing to do the work of a general contractor--such as applying for permits, obtaining bids from subcontractors and supervising the work--can reduce their construction costs to $40 to $48 a foot, Smith-Kim says.

Hiring Contractor

A contractor or skilled tradesman can be hired to provide guidance for $25 to $40 an hour; many lenders require borrowers to employ a licensed contractor before they’ll make a construction loan.

Reliable contractors can often be found through referral services operated by local trade groups. Bankers and suppliers can point out contractors who are financially sound, while the Better Business Bureau keeps files on tradesmen who have drawn complaints.

Smith-Kim suggests interviewing at least three contractors for the job, talking with their past clients, and settling on a contractor who is easy to communicate with. “And, of course, get everything in writing--including the date when the work will start and when it’ll be completed.”

Buyers who fear the construction process but don’t mind doing some repairs themselves often look for “fixer-uppers.”

‘Like Florida Sinkholes’

Lore has it that fixer-uppers are easy to find, can be bought at a deep discount and will soar in value if the buyer makes a few simple repairs. But in reality, most experts say, promising fixer-uppers are much harder to locate.

“Most of the properties advertised as ‘fixer-uppers’ are a lot like Florida sinkholes. You keep throwing money into them, and the cash just seems to disappear,” says Tom Lucier, a remodeler and author who has bought and renovated more than 30 run-down properties.

To find a diamond in the rough, first-time buyers should begin by doing what veteran investors do: Look in older areas that show signs of revitalization or the proverbial “pride of ownership.”

New construction, expansion and remodeling projects are clues that a neighborhood is on an upswing. It’s what some experts call the “dumpster theory”--several buildings with dumpsters out front, filled with torn-out construction material, are signs that investors and homeowners have faith in the area and prices are going to rise.

Seller’s Eagerness

The next step is to zero in on three or four houses in the neighborhood. The best fixer-uppers need only cosmetic repairs, such as a fresh coat of paint, new carpeting and drapes, better landscaping and modern hardware.

Lucier says the seller’s eagerness to unload the property can be just as important as the home’s physical condition.

“If you really want a bargain, only deal with people who want to sell their property worse than you want to buy it,” he says. “Maybe they’re getting divorced, transferred by their employer or having financial trouble.

“If they aren’t in a hurry to sell, you won’t be able to buy at a price that you like.”

Contingency Clauses

Lucier often finds these sellers through “for-sale-by-owner” ads in the newspaper, or by placing an ad that says “Wanted: Dirty Houses, Fast Closings.”

An offer to buy a fixer-upper should be made contingent on the property passing an inspection of its plumbing and electrical systems, foundation, roof and other big-ticket items. Such a clause allows the buyer to back out of the deal if the inspection turns up problems too costly to repair.

Financing the purchase can be difficult. Most lenders fear the promised improvements might never be made, so they’ll still demand a 10% or 20% down payment from the borrower.

Buyers who can’t come up with such a large down payment can sometimes get the seller’s permission to make some repairs while the property is still in escrow. If the repairs aren’t enough to convince a lender to make the loan, the deal is canceled and the buyer is reimbursed for outlays he made to fix the place up, plus a preset hourly fee for the time he put in.

As an alternative, Lucier tells cash-strapped buyers to search for sellers who have loans the buyer can assume without having to go through the loan-approval process. Many homes financed through private investors, the Federal Housing Administration and Veterans Administration fit that description.

The seller might even be willing to finance part or all of the purchase by agreeing to make a second mortgage and accept monthly payments from the buyer.

Whether it’s new construction or an older home, the key to a successful sweat-equity project is making a commitment of time and energy, and then honoring that commitment. “If you start a project but quit half-way through, you’ll be worse off than when you began,” says Smith-Kim at the Owner Builder Center. “There aren’t many people who’ll take a half-done job off your hands.”

Those sentiments are echoed by Kathy Kenny--who, appropriately enough, plans to christen the home she’s building in Topanga with an open-house party on Thanksgiving Day.

“You just can’t quit when things get discouraging,” she says. “You have to stick with it.

“You have no idea how many times I’ve ended the day crying--exhausted, sore, filthy . . . but satisfied.

“The bruises will heal and the dirt washes off,” Kenny says. “But the satisfaction of owning my own home will be with me forever.”

NEXT WEEK: Buying a home through “equity-sharing.”