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Loan for a fix-it-up home

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DavidV
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Loan for a fix-it-up home  Reply with quote  

Hello,

I'm trying to figure out if I can get a loan that would make the following plan work. I'm looking to buy my first home and came across a home which is in decent (livable) condition but needs a lot of work, so I can get it for a song. I have some handyman skills and can afford to pay contractors for other work as long as it's not all at once.

The problem is that the home is being sold as-is, and it's in bad enough condition that a bank won't approve a mortgage for it. I've considered a 203k renovation loan and I really don't want to go that route, primarily because I don't want to be paying interest on the cost of repairs.

It would be ideal to buy the home for cash, but I don't have the savings. I do have good credit, though--never missed a payment on anything in my life.

So what do I do?

I've heard that some banks (especially credit unions?) offer loans on fix-it-up houses, but I haven't been able to find any. I also considered getting an unsecured personal loan, but the best one I've found has interest rates over 10 percent APR and a term of only 60 months, and I'd like lower interest and a longer term so I have money left over to put into repairs. (I should actually be able to pay it off before 60 months, but I want lower monthly payments at first.) I don't know if that's realistic or not.

This is my first home purchase and I don't know what I don't know. Does anyone on here know of banks that offer loans on fix-it-up houses? How about the best place to get an unsecured personal loan with as long a term and as low interest as possible? And are there any other options I should be considering that I'm not aware of?

Thanks.
Post Thu Oct 17, 2013 12:15 am
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Wino
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Don't do it.

A home sold "as-is" can have myriad issues. I've bought and sold quite a few houses, and there's always something that needs fixing. If you buy brand new, there will still be things that need to be fixed, though the builder will fix items for the first year or so (assuming things were built wrong).

You could have plumbing problems, foundation problems, wiring problems, roof problems, insect infestation... the list is fairly endless, and none of the things I just listed are cheap to fix. Oh, and I've fixed everything I've listed, as well, in my time, with the exception of foundation problems. I had to pay a plumber to fix one of my sewage lines. That was $4K by itself. I also rewired 80% of a house by myself, and that still cost me over $1K just for materials, and that was before copper prices spiked like they are now.

Don't buy trouble unless the neighborhood is selling like hotcakes, in which case it's not a fixer-upper, but a tear-down and rebuild.
Post Thu Oct 17, 2013 2:39 am
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DavidV
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Thank you for the quick response. I agree that it would usually be very good advice, but I should have added this information: I actually nearly bought this house using a 203k loan, so I have all the inspection reports and everything for it. It turned out to have too many problems to justify the price they were asking at the time, so I walked away, but they've now knocked a lot off the asking price. So it's not a shot in the dark for me--I know (as well as you can before actually living there) exactly what's wrong with it.
Post Thu Oct 17, 2013 2:49 am
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Wino
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My suggestion not to buy remains (mostly) unchanged.

Let me take my US neighborhood as an example. The houses were built in the 1950's. They had no insulation, wiring was cloth insulation, and it was all two-wire (no ground). They originally sold for about $6200. Now, they are going for over $300K for a 2 bedroom, 1 bath, 1000 sq ft house. The last one that sold where I have any information is a list price of $324K, and a sales price of over $350K due to bidding wars (yes, it sold for over the list price).

Would I buy a fixer-upper in my neighborhood if I could get it for around $250K? Probably not. I would buy it if I could get it for $220K. In fact, there are two houses now that meet that criteria, and DW and I are looking in to our options.

But I know what I'm getting in to, and the neighborhood has more than doubled in sales price in about 6 years. That's a 12% return on average, not to mention the fact that I'll get rental income over and above the principal, interest, taxes, repairs, and maintenance once it is in rentable condition.

So, is that the kind of neighborhood you're looking at? If so, then I'd say "Go for it!" If not, then I'd say, "Pass on it."
Post Thu Oct 17, 2013 5:40 am
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DavidV
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I'm not really looking at it as an investment per se. It's more just a place to live that I can afford. (I'm a just-married teacher and poor as dirt.) The home is going for $35 thousand and comps suggest it will be worth about $80 thousand when it's fixed up. My contractor for the 203k loan I almost did (that's a kind of loan, incidentally, not a dollar amount--sorry if that was unclear) estimated repairs at $25 thousand. So I shouldn't be losing money, but mostly this is just an attempt to get someplace to live where I'm not renting.
Post Thu Oct 17, 2013 12:25 pm
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coaster
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It sounds to me like you've done your homework (sorry) and I'd say "go for it" for the reasons given only so long as you can get a mortgage. You won't get an unsecured personal loan for the amount you need and any other kind of a loan than a mortgage is going to have an interest rate that puts a lien on the property anyway, with an outrageous interest rate, to boot, that makes the project unfeasible.

Have you investigated whether there are any government-assistance programs you might qualify for? The Obama "Home Affordable" program doesn't help first-time homebuyers, but a quick google brought up pages and pages of other programs, many of which are state and even locally sponsored. Oh, boy ... more HOMEWORK!!! Laughing

~Tim~
Post Thu Oct 17, 2013 2:55 pm
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littleroc02us
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I hate to be the devil's advocate, but if you have to borrow money to buy the home and then borrow the money to make repairs on the home you cannot afford it. You see being underwater on a home isn't a good idea and borrowing yourself into oblivion won't pay off anytime in the future. There is a house on every block, I would personally rent cheaply for a year and save up as much money as you can and next year look into putting 20% down on a home that doesn't need these repairs and you'll be in a much better financial position. If you go forward with this idea, you'll be house poor.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Thu Oct 17, 2013 3:55 pm
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oldguy
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quote:
I've considered a 203k renovation loan and I really don't want to go that route, primarily because I don't want to be paying interest on the cost of repairs.



What turns you off on the 203? I would rather pay a low rate than pay 10% on an uncolleralized loan?

What terms were offered on the 203? Ideally, a $70k 30 yr <5% loan would do it - $35k to buy the house and $35k for repairs. The $25k est probably won't happen - on every facet of the job you'll uncover surprises, some good some bad, but it is almost certain that they'll cost extra.

It's best to get a low rate, long term loan. And use your income stream for higher & better uses (things that earn more than a real estate mortgage). (are either of you math teachers?)

Avoid shortterm high rate loans and avoid balloon notes (on one of our rentals I had to sell my truck to pay a balloon, don't make that mistake.)

edited to repair broken quote
Post Thu Oct 17, 2013 6:57 pm
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DavidV
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Thank you for the advice, but it's the math that makes it potentially appealing. I agree, I'd probably be looking at a $70 203k if I went that route. Let's assume I get a 30 year loan and pay it off completely in 10 years. Realistically I think it would be more like 15, but I'll go with 10 to make the case as strong on your side as possible. In that case, I've paid roughly $29,500 in interest over that 10 year period.

With a personal loan of $35,000 at a rate of 10 percent (simple interest) and a 10 year term, I'd be paying about $23,000 in interest. Also, I'd be saving money on repairs, as I could do some myself and get individualized contractor bids on others, saving money over the single 203k contractor. It's hard to imagine a scenario in which I didn't save at least $10,000, assuming the variable rate didn't explode.

I'm worried by the variable interest rate (obviously), which is why I probably won't go this route, besides the fact that I don't think anyone will give a $35,000 unsecured loan to someone with my income level, despite having excellent credit. If I could get it, though, I think that math makes it a pretty good use of money.
Post Fri Oct 18, 2013 3:14 pm
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coaster
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quote:
Originally posted by littleroc02us
.... and then borrow the money to make repairs on the home ...

I'm thinking that if the OP is willing to live in the home now as-is, then the repairs can be done as the money becomes available, and doesn't have to be borrowed; that might make it a viable proposition. "Renting cheaply" is an oxymoron these days. Wink

~Tim~
Post Fri Oct 18, 2013 5:01 pm
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DavidV
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quote:
I'm thinking that if the OP is willing to live in the home now as-is, then the repairs can be done as the money becomes available, and doesn't have to be borrowed

Right, that's the thought. Still haven't found a way to get the purchase price itself, though. A couple people suggested credit unions might be more flexible with loans using a pre-fix-it-up house as collateral, but none that I approached were willing/able.
Post Fri Oct 18, 2013 5:56 pm
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oldguy
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quote:
Originally posted by DavidV
Let's assume I get a 30 year loan and pay it off completely in 10 years. Realistically I think it would be more like 15, but I'll go with 10 to make the case as strong on your side as possible. In that case, I've paid roughly $29,500 in interest over that 10 year period.

With a personal loan of $35,000 at a rate of 10 percent (simple interest) and a 10 year term, I'd be paying about $23,000 in interest.



Let's look at your math a different way. Eg, when I refi a rental house and take out an extra $50k for 30 yrs, it costs $108,000 over 30 yrs ($58k in interest). I invest the extra $50,000 in an 11%/yr SP500 Index Fund and let it compound to $1,100,000 in 30 yrs. The point? I'm happy to pay $58k for the use of $50k for 30 yrs. (I've done it with each of our rental houses).

But I don't borrow 'short-high' capital (5 yrs, 10%), only 'long-low' loans. And I never use VAR loans or balloon loans, always 30 yr, fixed rate loans. That way I confine my risk to my investments while keeping my money supply safe. (Consider the outcome if your investments crash - & your VAR loan jumps to 15% and your balloon date is looming ahead.)

edited to fix broken quote
Post Fri Oct 18, 2013 8:00 pm
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coaster
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Hey!!  Reply with quote  

c'mon, oldguy, what's between you and quotes lately? You've been around here long enough to know how to use them properly. If the editor isn't working for you, insert the quote tags manually. (I always compose my own posts using manual tag insertion).

A broken quote makes it unclear who is the author of the words

(I highly value your contributions here, but I'm not gonna continue fixing your broken quotes)

http://en.wikipedia.org/wiki/BBCode

~Tim~
Post Sat Oct 19, 2013 5:35 am
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oldguy
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c'mon, oldguy, what's between you and quotes lately? You've been around here long enough to know how to use them properly. If the editor isn't working for you, insert the quote tags manually.
quote:


Yeah, something must be wrong w/ my quoter, it hasn't worked for a couple weeks now. I paste, highlite, and push the 'quote' button same as always. And all I get is 'quote' at the end of the quote. ???
Post Sat Oct 19, 2013 11:37 pm
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oldguy
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See what I mean?
Post Sat Oct 19, 2013 11:39 pm
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