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Reader TSB asked:
It seems like all the good deals out there are bank-owned, but some haven’t been lived in for awhile and have damage…. What’s the best way to go about figuring which ones are worth pursuing and how much it might cost to ‘fix’ what might be wrong (i.e. paint, carpet but especially big issues like mold/termites)?
Hi TSB — Great issue. I tell my class to stay away from true fixer-uppers. Cosmetic fixers can be good — paint, carpets, new refrigerator — but all those cost money too, and usually much more than you budget. Fixer-uppers where the paint/drywall is peeling, the floor is slanted, all the kitchen/baths/etc. are 40 years old are not for novice buyers.
It may seem romantic to brag about rehabilitating a fixer-upper — but the love affair will be over when you hit about $20,000 over budget. Rarely do true fixer-uppers sell at a large enough discount to make it worth the time, energy, effort and MONEY to make the investment worthwhile. For example, you may pay $175,000 for a fixer-upper that would be worth $225,000 in good shape. But it could easily run you $100,000 and six months or mortgage, taxes and insurance payments to get it to the shape where it is worth $225,000. So that just doesn’t make sense. Buy a property in decent shape!
You need to be practically annoying the inspector with questions and writing down what he believes are issues — bring a friend or two if you can — you are paying for his time so be nice and ask lots of questions. Plumbing, electrical, A/C, furnace, drain lines, foundation, etc. — everything costs money and you want to go in with your eyes wide open. I would ask, “Mr. Inspector, if you were looking at this house for your mom, what would you advise and caution her about?” This of course assumes he likes his mom … but we’ll just assume he does for now.
Be careful — and my apology to agents on this — about having your real estate agent in the house trying to minimize potential issues. The agent needs to document what you will ask the seller to fix or pay for, but unless the agent is a contractor, be cautious of their advising that something isn’t a big deal or it won’t cost that much — they only get paid if you buy the house. For costs to fix items, that is the job of the guy at Lowe’s, Home Depot or a contractor — which will be your next stop. You are making one of the biggest purchases of your life; you better do the hard work to get a good budget — BEFORE!!!! you buy. Then add 50 percent to your budget and double the number of months you believe it will take. You need to price out the costs yourself, and don’t lowball it — it will cost that much and probably more. Note: For big purchases buy 10 percent-off coupons to Lowe’s and Home Depot on eBay.
Mold is an issue in and of itself. If the inspector, the appraiser or termite guy finds mold or fungus, try to make the seller pay to have it cleared by a qualified mold remediation company. It is a major issue and let the seller pay for it. If it is more than just a minor amount — like maybe in the walls — be very careful on buying on a property where you could have a major issue. Major issue = major bucks!
Termites are specifically noted in your contract and the seller will usually pay to fix whatever is noted by the termite company. At least you can have termites killed by tenting. Major mold, on the other hand, is not that easy.
If you have more questions for Leonard Baron, please leave a comment below or send an e-mail to firstname.lastname@example.org.