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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?

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.

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.

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.

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.

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.

Re: Are we crazy?

This is a great thread!--------it gets to the heart of the matter regarding the responsibilities and cautions about buying, selling and owning property; I suppose most of us wouldn't even visit a forum called "This Old House" if we weren't in the situation of owning a house & being responsible for its upkeep and repair.

Homeowners come to own property in a variety of ways, many inheriting a house from parents or other relatives who have passed on; recently married young couples want to find & establish their own home, start a family, so there is a drive to find a house for sale that may or may not be a wise choice; many young homebuyers know very little about the structural aspects of a house for sale (does the basement become a swimming pool when it rains??; are the roof shingles on their last legs??---these things cost big bucks to repair); or the value of its location, or the intricacies of bank mortgages, or often, how to make even the simplest of repairs----and there's always a number of things, minor and major in owning a house that need repair, no matter how good a condition the property was in at the time of sale.

Confession time: yes, I bought a house many years ago that turned out to need a lot of work, and in my twenties, I knew very little about evaluating, selecting and sizing up the good & bad aspects of a house for sale; I knew very little about doing the repairs that had to be done, and couldn't afford to hire contractors---I found out the hard way that real estate agents represent the seller, and will do a con job on any prospective buyer; over the years I consulted DIY books at the library (the shelves are full of them), consulted the internet when it came along, and learned the rest mostly by trial & error---I have to say that many wholesale parts dealers and contractors were kind enough to lend free advice and demonstrate the basics to a struggling new homeowner.

Owning a house essentially becomes like owning a small business, especially if part of it is rented; one is forced to learn to do repairs in all phases of the building trades like plumbing, carpentry, heating, cooling, electrical, roofing, concrete work, insulation----you name it I've done it.

I was most impressed with the posts by Fencepost, DJ and Houston Remodeler; although they speak the hard truth, there's a lot to be learned about the house-buying process that screams out to the prospective house-buyer to LEARN FAST about the ins and outs of a purchase that will be with you for the next several decades, and could be a big mistake if you're not ready and haven't learned by experience to size up the conditions of the house and reject it if it needs a lot of repair----given the current market, there are still lots of houses out there that can't find a buyer, because the banks are just beginning to loosen up on the supply of mortgage money---one could say, then, that this is now a buyer's market, & don't be afraid to reject a property---you'll learn by going into & out of a lot of houses how to size up the qualities and defects of a given house.

I still haven't seen any photos of this 1850 farmhouse and there hasn't been any word yet on the condition of the major aspects like the foundation, the roof, the siding, plumbing, etc.---it's always best to bring a friend or relative along when house-shopping that has been thru the mill and knows what to look for on the good & bad conditions of the major house components; there are "buyer real estate agents", and "real estate house inspectors" that the house shopper can hire if no knowledgeable friends or relatives are available---it's just too big a step to take on a purchase that will stay with you for the next 3 decades.

Re: Are we crazy?

You have been given some honest straight forward advice. My guess, based on your description of the problems, is that you are not knowledgeable enough to take on such a project. To may people buy on emotion alone and find themselves locked into a nightmare. this type of project is for a long term commitment and most people become disenchanted well befor the project is completed.


Re: Are we crazy?

Oh and buy the way if you do decide to go forward with this project, there is a significant difference in prices you would get for restoration and modernization. They are two completely different acts of repairs.


Re: Are we crazy?

Good point Jack,

I know of what I speak because my first house I thought was a fixer upper, I saved 18 pieces of wood and threw the rest of the house away. It was a real money pit, but came out well. Only took 7 years.

Re: Are we crazy?

Looks like you would have to done a lot of work in your new home. Think again. Is it the right decision to buy this home?


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