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  1. #1
    Join Date
    Aug 2012
    Posts
    3

    Default Are we crazy?

    My wife and I have recently fallen in love with an 1850's farmhouse thats on the market. The problem is its in need of some major renovations. Many of the windows are done for, and at least a few of them have water damage to the sill. The roof itself is intact, but there is some damage under the eaves (looks like a bird was nesting). The roof was last redone in '86. The kitchen is a complete wash, the oven is a gonner, and I'm not sure I trust the stove top. The basement has an added on sun room (thats beneath the kitchen) that is not completly sealed from the outside. There is also mold in the basement. The house has an oil furnace (last recieved maintenance around '98) with forced hot air, but it only feeds to the first floor. The second floor has a single hall vent. The electrical wiring is a bit sketchy. The breaker box looks new, but in the attic I found some fabric insulated wiring and (of all things) an old fashion bare metal flip switch which looks like it would better fit in a Frankenstien movie than a house.

    With all that said, the house is in a great neighborhood, looks charming, and has great land around it. It's a huge ammount of work, but it is still incrediablly tempting.

    My problem is I don't even know where to start estimating the repair cost to know if getting a 203k to purchase and fix up is even possible. Should we go straight to getting a contractor to take a look and give us an appraisal?

  2. #2
    Join Date
    Dec 2010
    Location
    Houston Texas
    Posts
    2,969

    Default Re: Are we crazy?

    Work with a realtor and a good contractor.

    Start with the realtor. Ask them how much the house would be worth if it were repaired and modernized. They will give you a range depending on the level of finish to the remodeling. Keep in mind you get no real increase in value from repaired electrical, plumbing, windows, roofing, structural, insulation or most of the basics. You do get an increase in value from remodeling that shows on the surface (provided the nuts and bolts are done too- not just the pretty part)

    Then talk with a contractor. Have him examine the house thoroughly. As not to waste his time, give him the asking price and the "after fixed up" estimate of value from the Realtor. Ask him if its possible to make all the needed repairs for the difference between the two numbers. If he is unsure, then some pencil sharpening is in order to get firm numbers on how much repairs will take.

    House value when repaired minus the cost of repairs = the highest purchase price. This has nothing to do with the asking price. Base your purchase offer on this formula, with 20% wiggle room for the repair costs. You may add in the costs of living somewhere else while some repairs are being done. If you are doing the work yourself don't cheat yourself on the value of your work. You should be compensated the same as a hired person.

    Without seeing the house, this sounds fairly typical; Someone let the house maintenance slide into disrepair because houses can be money pits. Unless the purchase price is low enough to justify ALL the repairs needed to modernize, waterproof, and make the house safe, then walk away and buy another house. Don't purchase someone else's problems.

  3. #3
    Join Date
    Dec 2010
    Location
    Houston Texas
    Posts
    2,969

    Default Re: Are we crazy?

    The other problem will be financing. Speak with your banker as to their guidelines to the risk level they are taking these days. Remember the bank's stance; if you default on the loan, they don't want to be stuck with a house that needs serious repair to be able to be sold.

  4. #4
    Join Date
    Nov 2009
    Posts
    71

    Default Re: Are we crazy?

    Go with a contractor which has worked with 203k properties before. Maybe even one who has already been accepted by your lender.

    They will know the ins and outs of the procedure.

  5. #5
    Join Date
    Jul 2010
    Location
    SoCal
    Posts
    6,598

    Default Re: Are we crazy?

    From what you are describing, yes you are crazy, and here's why:

    1. There is a lot of money to be made on fixers, IF you know how to do at least 75% of the work, IN A PROFESSIONAL WAY. What you save is most of the labor. But...

    2. Hiring a contractor and subcontractors will probably bring the final price of the house (what you pay plus all remodeling costs) to a level which will be over the market value.

    3. It gets worse when you start upgrading above standard quality.

    My advice: move on to the next property. Find one with less things to do, and leave this one to the experienced renovators.

  6. #6
    Join Date
    May 2008
    Location
    Pacific Northwet
    Posts
    1,629

    Default Re: Are we crazy?

    What DJ said, plus...

    Don't plan to live in the house while you are renovating. That would make it take much longer.

    Houston's advice is good, but to clarify his math:

    Value after renovating to neighborhood standards MINUS the cost of renovation MINUS another 20% EQUALS purchase price

    ...which means your offer price must be even lower to allow for negotiation. Just don't go above your calculated purchase price.

    At least that's if you're expecting to use this property as a financial vehicle. On the other hand, if you're planning to live there until you die and you don't care about your children's inheritance, the fact that it's a place you like has some value that only you can see. (That is, if you have the cash, there's no limit to what you can offer.) Of course, your lender sees it only as a financial vehicle and places exactly zero value on how much you love it.

    Keep in mind that with a conventional loan, banks will only finance to appraised value. For example, let's say you qualified for $100,000 with a 20% down payment (finance 80%). If you offer $100,000 and it appraises at $90,000, the bank will only lend $72,000 (80% of 90K). You then have a choice: allow the sale to fail; offer $90,000; or offer $100,000 and pay $28,000 (20% of 90K + 10K) down.

    With a rehab loan the math is similar, but it is financed according to the estimated post-renovation value (and many rehab loans are government backed so only require 3-5% down). Typically, the bank will initially fund only the sale and then will periodically fund renovation costs.
    The "Senior Member" designation under my name doesn't mean I know a lot, it just means I talk a lot.I've been a DIYer since I was 12 (thanks, Dad!). I have read several books on various home improvement topics. I do not have any current code books I can refer to. I was an apprentice plumber for two years.

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