It may be your budget or the thrill of doing it yourself, but you are looking for a diamond in the rough. But how rough can a home be before a lender refuses to risk a mortgage?
When negotiating a contract, make sure to include house inspections for structural integrity, defects, and potential problems. This is not part of the home appraisal. It is a separate detail. A house inspection can determine the health of the house you are buying.
Professional inspectors will find all the major problems whether it's a bad roof, leaking pipes, or termite damage. As part of the report, you will receive a list of items that need to be repaired or replaced, the time frame, and potential costs. If you are buying a fixer, you may find that your lender will need to check. Some will, some will not. But you should stick to one to protect your best interests.
What if you are lucky and have no significant problems but only small ones? Maybe the carpet is worn out and needs to be replaced. The deck may need a little work. It may only require new paint and fresh air.
Small cosmetic concerns are usually not enough to deter lenders but may lead to negotiations between buyers and sellers. Unless you have done this before, you may find that the right agent is valuable for you to negotiate. Having a good team is imperative to being successful as an investor. An experienced real estate agent should be a key player on your team along with a reliable quality general contractor.
If you want the seller to repair something, such as a fixed mailbox and a painted deck, make sure it is in the contract. If it is, the seller must fulfill its obligations. You may be able to make the assessment include repairs as stated in the contract. This can help you when collateralizing a loan because the lender will only lend the smaller of the assessed or purchase price. Just make sure everything is in the contract.
Sometimes, your seller may request repairs after closing. Many buyers just ask for concessions from the seller. For example, a seller will agree to reduce the purchase amount by US$5,000 instead of installing a US$5,000 carpet before closing, which would cost the buyer to purchase a new carpet.
But if you don't have that $5,000 in hand to buy the carpet, don't expect your lender to give it to you. Even if your contract states that the seller will give you back $5,000 after closing, don't expect it to happen. Cash allowances written into contracts can't happen.
The lender will not allow the seller to hand over cash at closing. Your real estate agent should steer you away from this and help construct a sales contract that will please both the buyer and the seller. But don't expect to come home with $5,000. Unless you use a hard money loan to purchase the property to cover your repairs. Once you complete your renovations you can refinance the home into a conventional loan.
Buying a fixer-upper can be rewarding. You get to choose how you want to improve the home. But it is a lot of work and definitely not for every buyer or lender. Your best bet is to be completely upfront with your lender about your intentions and have an experienced general contractor ready to help you with your investment property rehab. This will help the transaction to go smoothly.
If you have a renovation project coming up and would like a free estimate, give us a call at 281-901-0707.
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