Is the house in fair condition a good bet? Here are some things to consider if the affordable home you’re eyeing needs some work.
The first thing to consider when buying a home is location. Location, location location is the credence held by most real estate experts. The reality of the market; true fixer homes are far and few and generally are not lendable. For this post we will be focusing on homes that are bankable and need a little TLC. There is virtually no inventory of distressed homes anymore. This is result of more exuberant housing economy. These potential repairs may be indicative of a good value for your money:
- new roof
- new appliances
- new paint
- updating the interior
Buying tip 1: Don’t be automatically turned off by the home because it needs some attention especially if it is affordable and is in the area in which you want to live.
Price Vs Cost Of Repairs
Making a low ball offer on a house because it needs a new roof for example might not be the best approach as the market might otherwise support the list price even more so if there are other interested parties. All homes ultimately will need a new roof at some point anyway. It is one of many ulterior costs you will incur as a homeowner over the longer term.
Buying tip 2: Make list of the repairs that can you and cannot live with.
How bad are the repairs? Say the roof has an economic life of five more years. The price of the home is very affordable and the front yard needs a bit more upkeep. Look beyond the cosmetic repairs. Is the home quiet? Does it have a big yard? What’s the neighborhood like? How’s the school district? Can you live in the property and make the repairs over time as your finances allow and permit? If the answer is no, it would probably be best to not buy that home, as you probably would be biting off more then you could chew. However, if you can make the repairs over time and the property is safe and inhabitable, in many situations the house may be worthwhile.
Not as popular as they were pre-housing crisis, these loans allow you to finance the repairs of the property so long as you have the financial capability of supporting loan amount to buy the property as well as debt servicing the improvement costs. These loans also contain tighter credit requirements i.e. higher credit scores and typically require down payments of at least 20%.
If the cost of the repairs of the property can be cash financed, you usually have the option of buying the house with less money down. Let’s say you’re buying a home with a $50,000 down payment. The house needs repairs totaling $20,000. Instead of buying the home using $50,000, you use $30,000 ($20,000 going to improvements). The difference in the mortgage payment would be to the tune of $100 per month. The market both in both housing prices and interest rates will continue to evolve, changing your equity position creating opportunities to re-structure your home mortgage. You may have the option to refinance to lower your payment or cash out your equity to replenish your cash that was originally used to repair the house.
Buying tip 3: Avoid buying a home with the automatic expectation of being able to refinance in the future. Refinancing in the future should be an “elective” decision.
If the idea of buying a home for hundreds of thousands of dollars and making repairs over time does not sit well with you, buying house might not be in your best financial interest as houses can be money pits, often times resale homes over 25 years old fit this category. This is precisely why you should work with a sharp real estate agent and loan professional to sandwich your efforts in determining if the house that needs some work really might make sense after all.
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