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Tear Down, Fixer Upper House or Turnkey Option?
A basic guide to buying a fixer upper home begins with an honest discussion of the potential pitfalls that the soon-to-be homeowner may have to weather before moving in. First and foremost, there is no standardized definition of the term; one person’s gently used pre-owned home becomes someone else’s money pit.
In the same vein, what may be advertised as a “fixer upper/starter” can euphemistically refer to a home that is cheaper to tear down than fix. Thus, it stands to reason that home buyers must decide – individually – how much labor and materials costs they feel comfortable investing in a home (in addition to the asking price).
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Financing Fixer Upper Homes
Finding fixer upper homes for sale is not difficult; paying for them is a bit trickier. The U.S. Department of Housing and Urban Development (a.k.a. HUD)(1) explains that banks do not lend money to finance a mortgage on a home that requires extensive repairs – until all these items are addressed. Of course, before the would-be home buyer can undertake the repairs, the seller needs to receive the funds to complete the real estate transaction.
HUD understands this problem that it terms a “quagmire” and devised the 203(k) program, which lends the borrower sufficient funds to buy the fixer upper and also pay for repairs and improvements. This is not a loan program available to investors intending to ‘flip’ the homes, but only to buyers planning on occupying the fixer uppers as their primary residences. In addition to the foregoing, the fixer upper must be in compliance with all local zoning ordinances(2).
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Nuts and Bolts Guide to Buying a Fixer Upper Home
- Find a fixer upper that requires repairs in keeping with the home buyer’s level of comfort.
- Sign a sales contract that stipulates the buyer’s ability to secure a 203(k) loan as a contingency.
- Apply for a 203(k) loan by filling out the needed paperwork for a mortgage loan but also supplying a well-thought out proposal that details line by line the anticipated repairs. Each line item must include a realistic cost estimate encompassing materials and labor.
- Hire an appraiser to evaluate the property and offer a professional estimation of its worth after all the proposed repairs are done.
- Invest approximately 3.5 percent (as opposed to only three) as a down payment, close the loan, and be prepared to start repayment on the mortgage within about 30 days after closing.
- Fund repairs for the fixer upper out of an escrow account that holds the money earmarked for repairs and renovations. Keep in mind that the escrow account releases money to the contractors, not the homeowner, as work is being completed.
As a final note in this guide to buying a fixer upper home, take great care to evaluate your, and also your family’s ability and willingness to deal with extended periods of time spent repairing a home and dealing with the noise and circumstances of contractors in the home.
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Photo credit: “3D Realty Handshake” by www.lumaxart.com/Wikimedia Commons at http://commons.wikimedia.org/wiki/File:3D_Realty_Handshake.jpg