When a family begins searching for a new home, they will come across more than a few surprises. Prices are never what they seem, and houses are never as well-maintained as the pictures show. However, a creative and flexible mindset can help many potential homeowners land the home of their dreams and at a fraction of the cost.

Individuals with handyman, painting or construction experience can turn their skill into a “sweat equity” down payment on their new home. Sweat equity allows an individual to contribute labor and materials toward a home’s down payment.

The sweat equity process

Sweat equity is only as valuable as a house needs it. Brand new or recently renovated houses are unlikely to need additional work, especially after the seller already invested in the labor. Though potential buyers may not find a house that needs work ideal, their labor could turn an affordable home into their dream house. The following steps will help sellers locate a buyer willing to include a sweat equity deal in the contract:

  1. Sweat-equity loan program: Buyers first must fill out a loan application and inform their loan officer of their sweat equity plan. Not all loan programs allow for sweat equity, so double-check the fine print.
  2. “As-is” houses: Houses listed “as-is” usually require maintenance before they are livable, but these are the perfect targets for sweat equity buyers. Contact the seller and provide the loan information.
  3. Negotiate prices: Buyers will negotiate two prices, the “as-is” price and the “as-completed” price. The “as-is” price represents the home before repairs, and the “as-completed” price takes the cost of those repairs and adds them to the value. An appraiser can evaluate the needs of the home as well as confirm the cost of the improvements.
  4. Sweat: The buyers then perform the work in a “workman-like manner.” An appraiser reviews the work to confirm its value.
  5. Loan finalizations and close: Once work is complete, agents and appraisers can confirm the as-is and as-completed values, calculate the value of the sweat equity and apply that number to the down payment. All buyers have to do is pay the remainder of the down payment and close!

Consult with the experts

A real estate agent can help buyers shop for loans that allow for sweat equity and recommend experienced appraisers. Buyers drafting sweat equity loans can contact a local lawyer familiar with real estate law to review the terms or assess a potential legal claim.