Should we buy the fire house?
May 25, 2011 11:23 AM Subscribe
Earlier this month, there was a fire in the house my boyfriend and I were renting. Basically the attic fan caused a fairly extensive fire which moved through the ducts and damaged the roof and ceiling. Not much damage was done to the ground floor, other than smoke and water. My boyfriend and I are now considering buying the house, and are looking for advice and experiences you might have for this situation.
We really loved the neighborhood where the house is, and had an excellent relationship with the landlords. They offered to let us rent again, but we're now thinking that because of other things going on in our lives, this might be a good time to buy. The insurance estimated damage at $135,000, which will go to upgrades in the house: new metal roof, new AC, revamped kitchen, etc. The owners have said that if we want to buy it, they will allow us to basically design the remodel ourselves, choose cabinets, counters, paint, etc.
They have also offered owner financing as a possibility. My boyfriend and I have done some preliminary research, and it seems like most of the time people use owner financing because they do not have enough for a mortgage down payment. This wouldn't be the case for my boyfriend and I, so we're wondering if that would have any advantage for us over getting a mortgage through our credit union.
Also, a friend mentioned in passing that she was concerned that the owners were trying to take advantage of us, and that a house where there was a fire was a "lemon" and we might have issues insuring it or something in the future. As I said, we have an excellent relationship with the owners, and feel they are responsible people, beyond which I would assume there are building codes which they would have to meet when redoing the house, and we will obviously have it inspected before commiting to buy it, so I'm not sure that she knows what she's talking about, but her comment made me a little nervous. Should I be?
Any experiences, advice, or ideas about buying a house with owner financing vs. a mortgage, or with buying a house where there has been a fire would be much appreciated!
We really loved the neighborhood where the house is, and had an excellent relationship with the landlords. They offered to let us rent again, but we're now thinking that because of other things going on in our lives, this might be a good time to buy. The insurance estimated damage at $135,000, which will go to upgrades in the house: new metal roof, new AC, revamped kitchen, etc. The owners have said that if we want to buy it, they will allow us to basically design the remodel ourselves, choose cabinets, counters, paint, etc.
They have also offered owner financing as a possibility. My boyfriend and I have done some preliminary research, and it seems like most of the time people use owner financing because they do not have enough for a mortgage down payment. This wouldn't be the case for my boyfriend and I, so we're wondering if that would have any advantage for us over getting a mortgage through our credit union.
Also, a friend mentioned in passing that she was concerned that the owners were trying to take advantage of us, and that a house where there was a fire was a "lemon" and we might have issues insuring it or something in the future. As I said, we have an excellent relationship with the owners, and feel they are responsible people, beyond which I would assume there are building codes which they would have to meet when redoing the house, and we will obviously have it inspected before commiting to buy it, so I'm not sure that she knows what she's talking about, but her comment made me a little nervous. Should I be?
Any experiences, advice, or ideas about buying a house with owner financing vs. a mortgage, or with buying a house where there has been a fire would be much appreciated!
It's hard to say whether it's a good idea without knowing what you plan to pay for the house, what the local property market is like, and how much you've been paying in rent. It's a massive financial investment, or sink hole, and that's your number one concern. This isn't about a home, you already have a home.
You have three a lot options as I see it:
1) Buy it now, and make the sale conditional on repairs by skilled contractors, to code and to your standards. (If you do this, it's because you're shooting for an unprecedentedly low price, IMHO, why else would you be in such a hurry?)
2) Wait and see what the repairs are like. (This seems like the sanest approach.)
3) Don't buy it. (Keep renting, or look elsewhere.)
Regarding the fire, don't skimp on the home inspection. Make any offers conditional on it, and make sure they're thorough.
If you have a house, a good relationship with the landlords, and a good neighborhood, then I don't see why you'd be in a hurry to buy... but if you do decide to buy, proceed cautiously, and take control of the situation.
posted by Stagger Lee at 11:46 AM on May 25, 2011 [1 favorite]
You have three a lot options as I see it:
1) Buy it now, and make the sale conditional on repairs by skilled contractors, to code and to your standards. (If you do this, it's because you're shooting for an unprecedentedly low price, IMHO, why else would you be in such a hurry?)
2) Wait and see what the repairs are like. (This seems like the sanest approach.)
3) Don't buy it. (Keep renting, or look elsewhere.)
Regarding the fire, don't skimp on the home inspection. Make any offers conditional on it, and make sure they're thorough.
If you have a house, a good relationship with the landlords, and a good neighborhood, then I don't see why you'd be in a hurry to buy... but if you do decide to buy, proceed cautiously, and take control of the situation.
posted by Stagger Lee at 11:46 AM on May 25, 2011 [1 favorite]
It's not clear to me on when they intend to sell it to you, and I think that matters.
You mentioned that the current owners "will allow" you to design the remodel, which indicates to me that they intend to own it through the remodel, and sell it to you at the post-remodeled market value price, possibly with a conditional contract as Stagger Lee says. That seems like a standard transaction to me, with three slight differences: you get to customize the house to what you want (positive), have a house that has had some damage (negative), and have to ensure that the construction is done to your specifications (negative). But since you don't bear the bulk of the financial risk of the renovation cost and you can have the house inspected prior to committing, I think this is low risk. I would insist on a lower than market value price for this since you are giving the sellers the benefit of a guaranteed sale before they do all the work. I'd want to see the bills as well to make sure they spend all 135K.
The alternative is for them to sell you the house now at a discounted price (at least 135K lower than market value) and for them to finance the purchase and loan you the 135K to fix the house up yourself. Assuming that the insurance company allows this and will give them a cash settlement, his is higher risk for you but also (in my opinion) higher reward. The reward is that you are actually in control of the renovation, and if you can bring it in for under $135K you get the house at a net lower price. I would want a bigger discount to market value than in option 1, since you're saving them a lot of hassle by doing this.
Owner financing is key in this case. You don't want to deal with a bank during the construction phase, and are far better off structuring a deal with the owner to pay traditional mortgage payments for up to 5 years with no pre-payment penalty. Once you finish the house, you refinance with the credit union and pay off the owner. There are a few risks with this: interest rate risk, since you'll need a mortgage in the future. You also have principal risk, since you're going to have to be comfortable that the house will appraise for enough to pay off the owner. I would consider doing this if you have a substantial cushion in the numbers (enough to cover for a drop in the value of the house), but it does make sense in this kind of transaction.
Also, you should get a good real estate lawyer for all of this (ESPECIALLY IN THE SECOND SITUATION). As to whether you'd be scared, I wouldn't. There is certainly opportunity here, but you should be well compensated for buying the house in this circumstance. That compensation could be buying the house below market value, or designing the house while still having not fully committed to buying it, or getting a low rate on owner financing, etc. It sounds like the owners want to get out, and I think you can use that to your benefit.
posted by true at 11:56 AM on May 25, 2011 [2 favorites]
You mentioned that the current owners "will allow" you to design the remodel, which indicates to me that they intend to own it through the remodel, and sell it to you at the post-remodeled market value price, possibly with a conditional contract as Stagger Lee says. That seems like a standard transaction to me, with three slight differences: you get to customize the house to what you want (positive), have a house that has had some damage (negative), and have to ensure that the construction is done to your specifications (negative). But since you don't bear the bulk of the financial risk of the renovation cost and you can have the house inspected prior to committing, I think this is low risk. I would insist on a lower than market value price for this since you are giving the sellers the benefit of a guaranteed sale before they do all the work. I'd want to see the bills as well to make sure they spend all 135K.
The alternative is for them to sell you the house now at a discounted price (at least 135K lower than market value) and for them to finance the purchase and loan you the 135K to fix the house up yourself. Assuming that the insurance company allows this and will give them a cash settlement, his is higher risk for you but also (in my opinion) higher reward. The reward is that you are actually in control of the renovation, and if you can bring it in for under $135K you get the house at a net lower price. I would want a bigger discount to market value than in option 1, since you're saving them a lot of hassle by doing this.
Owner financing is key in this case. You don't want to deal with a bank during the construction phase, and are far better off structuring a deal with the owner to pay traditional mortgage payments for up to 5 years with no pre-payment penalty. Once you finish the house, you refinance with the credit union and pay off the owner. There are a few risks with this: interest rate risk, since you'll need a mortgage in the future. You also have principal risk, since you're going to have to be comfortable that the house will appraise for enough to pay off the owner. I would consider doing this if you have a substantial cushion in the numbers (enough to cover for a drop in the value of the house), but it does make sense in this kind of transaction.
Also, you should get a good real estate lawyer for all of this (ESPECIALLY IN THE SECOND SITUATION). As to whether you'd be scared, I wouldn't. There is certainly opportunity here, but you should be well compensated for buying the house in this circumstance. That compensation could be buying the house below market value, or designing the house while still having not fully committed to buying it, or getting a low rate on owner financing, etc. It sounds like the owners want to get out, and I think you can use that to your benefit.
posted by true at 11:56 AM on May 25, 2011 [2 favorites]
Response by poster: bartonlong, I believe the water affected the wiring and the drywall and obviously the roof and ceiling, but not any of the floors. The owners got the house cleared out fairly quickly, and because the fire was only in the roof/ceiling area, I think that cut down on damage to the floor. The owners are handling the builders because we have not actually committed to buy the house, but are asking for design advice even if we don't buy it.
Stagger Lee, we would like to buy before November because of possible career changes which could affect the liklihood of a good mortgage and interest rate. The price of the house is good, but is not the major factor in the decision to buy soon.
posted by odayoday at 12:00 PM on May 25, 2011
Stagger Lee, we would like to buy before November because of possible career changes which could affect the liklihood of a good mortgage and interest rate. The price of the house is good, but is not the major factor in the decision to buy soon.
posted by odayoday at 12:00 PM on May 25, 2011
Response by poster: Just to clarify though, we are planning to wait until the repairs are done to decide if we want to buy or not. We're not builders or at all experienced in home repairs (like AT ALL), so I don't think it would be wise for us to take on that sort of thing.
posted by odayoday at 12:05 PM on May 25, 2011
posted by odayoday at 12:05 PM on May 25, 2011
Response by poster: Also, if anyone has any recommendations for books on home buying in general, I would appreciate it!
posted by odayoday at 12:34 PM on May 25, 2011
posted by odayoday at 12:34 PM on May 25, 2011
It might not be wise for you to purchase the house if you're not experienced with home repair. (The idea that home ownership is for everyone is one of my biggest complaints about the recent couple of decades. It isn't for everyone. You need to be more than willing to take on a significant self-education burden and a significant time-spent-doing-maintenance burden on top of the financial burden, or you won't have any standards for how work is done.)
What are the building owners' motives for selling it.
Do you have any friends who are into home improvement that you can go watch the progress of the renovation with?
Things I'd look for:
- Any wood that remains gets coated with a sealant that keeps the smell of the fire in.
- All wiring is replaced.
- All insulation in the walls is replaced.
- Depending on the flooring material, all is replaced down to the subfloor and the subfloor is sealed.
- All the cabinets and other fixtures are replaced.
- Everything is brought up to code. There should be permits from the city, obviously.
You will never get the smell of smoke out of the house unless the above steps are followed, and yes, this will mean that it will be a 'lemon'. Other issues include contamination from things that burnt during the fire or chemicals used to fight the fire. All of this needs to have been removed and/or sealed. Then there's issues that might be related to the age of the house, like asbestos and lead. You didn't tell us anything about the location of the structure or the real estate market.
And on top of that, I would get approved for a mortgage and see what a bank thinks is reasonable. I would also make sure that ownership vs. construction is a good deal.
I don't think you've done enough research on what this means for you or how to go about doing it.
posted by SpecialK at 12:35 PM on May 25, 2011 [1 favorite]
What are the building owners' motives for selling it.
Do you have any friends who are into home improvement that you can go watch the progress of the renovation with?
Things I'd look for:
- Any wood that remains gets coated with a sealant that keeps the smell of the fire in.
- All wiring is replaced.
- All insulation in the walls is replaced.
- Depending on the flooring material, all is replaced down to the subfloor and the subfloor is sealed.
- All the cabinets and other fixtures are replaced.
- Everything is brought up to code. There should be permits from the city, obviously.
You will never get the smell of smoke out of the house unless the above steps are followed, and yes, this will mean that it will be a 'lemon'. Other issues include contamination from things that burnt during the fire or chemicals used to fight the fire. All of this needs to have been removed and/or sealed. Then there's issues that might be related to the age of the house, like asbestos and lead. You didn't tell us anything about the location of the structure or the real estate market.
And on top of that, I would get approved for a mortgage and see what a bank thinks is reasonable. I would also make sure that ownership vs. construction is a good deal.
I don't think you've done enough research on what this means for you or how to go about doing it.
posted by SpecialK at 12:35 PM on May 25, 2011 [1 favorite]
Something you may not have thought about: buying property with someone to whom you are not married is kind of a mess.
Or, rather, the buying is pretty easy. The mess is if you happen to break up.
Here's the thing: when people go through a divorce, there are established legal procedures for how property is divided and who is entitled to what. Both sides can be represented by attorneys, to make sure that no one pulls any shenanigans. But if you aren't married, it's basically a free-for-all. The legal system currently has absolutely no way to deal with the dissolution of a relationship it never officially recognized in the first place. Who gets the mortgage? Can you get out from under it? What happens to the equity in the house? If it is to be divided, along what lines? Equally? What if one of you was paying more? What if you weren't keeping track of that, but one of you made substantially more? Who gets credit for repairs and maintenance costs? Especially if you do wind up doing some work yourselves? The list of potential points of conflict goes on.
I'm not saying that you should get married before you do this--though now might be as good a time as any to have that particular conversation--but you should definitely talk to an attorney about how to structure some sort of agreement as to how this thing is going to go down, not just with respect to the two of you and the seller, but between the two of you as such. Working that out ahead of time could save you both a lot of trouble later on.
posted by valkyryn at 12:35 PM on May 25, 2011 [1 favorite]
Or, rather, the buying is pretty easy. The mess is if you happen to break up.
Here's the thing: when people go through a divorce, there are established legal procedures for how property is divided and who is entitled to what. Both sides can be represented by attorneys, to make sure that no one pulls any shenanigans. But if you aren't married, it's basically a free-for-all. The legal system currently has absolutely no way to deal with the dissolution of a relationship it never officially recognized in the first place. Who gets the mortgage? Can you get out from under it? What happens to the equity in the house? If it is to be divided, along what lines? Equally? What if one of you was paying more? What if you weren't keeping track of that, but one of you made substantially more? Who gets credit for repairs and maintenance costs? Especially if you do wind up doing some work yourselves? The list of potential points of conflict goes on.
I'm not saying that you should get married before you do this--though now might be as good a time as any to have that particular conversation--but you should definitely talk to an attorney about how to structure some sort of agreement as to how this thing is going to go down, not just with respect to the two of you and the seller, but between the two of you as such. Working that out ahead of time could save you both a lot of trouble later on.
posted by valkyryn at 12:35 PM on May 25, 2011 [1 favorite]
> ownership vs. construction
I meant ownership versus renting is a good deal in your area. There are calculators for this online.
posted by SpecialK at 12:36 PM on May 25, 2011
I meant ownership versus renting is a good deal in your area. There are calculators for this online.
posted by SpecialK at 12:36 PM on May 25, 2011
I'm not sure your credit union is willing to take a damaged house as security to your mortgage. If they do, they will have to create a bridge builder loan, bring in someone to supervise and inspect the reconstruction; then slowly disburse the fund in stages. Also, during the construction, where will you live, and how will the rent be disburse. It'll be too labor-intensive to them, and too risky. IMO, a situation like true describe is more probable.
You should approach this like a normal transaction; with full inspection, etc... Your bank will require that anyway; but a house is a lot of money, and unless you have specialized knowledge, its risks and value are not easily determined. I'm just thinking: what would happen if during the remodeling, more problems show up? or the owner fall into foreclosure? or god forbid, there is another fire?
posted by curiousZ at 12:38 PM on May 25, 2011
You should approach this like a normal transaction; with full inspection, etc... Your bank will require that anyway; but a house is a lot of money, and unless you have specialized knowledge, its risks and value are not easily determined. I'm just thinking: what would happen if during the remodeling, more problems show up? or the owner fall into foreclosure? or god forbid, there is another fire?
posted by curiousZ at 12:38 PM on May 25, 2011
Response by poster: Just to be clear again, we would only be buying the house after the remodeling has been done. In a sense it would be a damaged house, in that it had been damaged, but the owners are handling the remodeling, and we will not buy it if we (and the inspector) are not comfortable with how it has been done.
The house is in a nice area, fairly close to the center of the city. The location is good, and property values should go up. The rent market is currently very expensive (rent on houses like the one we had, in the same neighborhood have gone up $300-400 per month in the past year or so), so buying is the more cost-effective option.
Also, yes, we plan to speak to a lawyer about details of dealing with the house as an unmarried couple. I think reminders about that are a good thing, so thanks for mentioning it!
posted by odayoday at 12:46 PM on May 25, 2011
The house is in a nice area, fairly close to the center of the city. The location is good, and property values should go up. The rent market is currently very expensive (rent on houses like the one we had, in the same neighborhood have gone up $300-400 per month in the past year or so), so buying is the more cost-effective option.
Also, yes, we plan to speak to a lawyer about details of dealing with the house as an unmarried couple. I think reminders about that are a good thing, so thanks for mentioning it!
posted by odayoday at 12:46 PM on May 25, 2011
See, you actually want the house BEFORE the repairs are done. A multitude of (construction) sins can be covered up with drywall. This is an opportunity to fix structural issues and bring systems like ventilation, electrical, and wiring up to current code.
You are putting too much trust in these owners. Unless they are onsite daily and have sufficient knowledge to eyeball mistakes and whatnot as the repairs progress, I would think triple about buyingbthis property.
And you are dead wrong about the water. In the landlord biz, we say water is our worst enemy. It gets everywhere and destroys everything, eventually. If fire trucks hosed the roof, water drenched the floors below. Remediation specialist, for sure.
On a rebuild like this, there are plenty of opportunities to make mistakes or cheap out on necessary repairs. At the very least, you should professionally inspect the repairs before the walls are closed up so that you can be sure all structural repairs, wiring, and plumbing (original and new) are correct and to code.
If the owners will allow you to professionally inspect the property mid-repair, maybe this can work in your favor. You want to identify and correct any hidden expensive problems before you buy the property and those problems become yours.
Pro-tip: make sure there are permits pulled for all repairs. If you can be there on the days the building inspectors come by, do that.
posted by jbenben at 1:22 PM on May 25, 2011 [1 favorite]
You are putting too much trust in these owners. Unless they are onsite daily and have sufficient knowledge to eyeball mistakes and whatnot as the repairs progress, I would think triple about buyingbthis property.
And you are dead wrong about the water. In the landlord biz, we say water is our worst enemy. It gets everywhere and destroys everything, eventually. If fire trucks hosed the roof, water drenched the floors below. Remediation specialist, for sure.
On a rebuild like this, there are plenty of opportunities to make mistakes or cheap out on necessary repairs. At the very least, you should professionally inspect the repairs before the walls are closed up so that you can be sure all structural repairs, wiring, and plumbing (original and new) are correct and to code.
If the owners will allow you to professionally inspect the property mid-repair, maybe this can work in your favor. You want to identify and correct any hidden expensive problems before you buy the property and those problems become yours.
Pro-tip: make sure there are permits pulled for all repairs. If you can be there on the days the building inspectors come by, do that.
posted by jbenben at 1:22 PM on May 25, 2011 [1 favorite]
(The idea that home ownership is for everyone is one of my biggest complaints about the recent couple of decades. It isn't for everyone. You need to be more than willing to take on a significant self-education burden and a significant time-spent-doing-maintenance burden on top of the financial burden, or you won't have any standards for how work is done.)
I favourite this comment very much.
posted by ovvl at 7:52 PM on May 25, 2011
I favourite this comment very much.
posted by ovvl at 7:52 PM on May 25, 2011
we will not buy it if we (and the inspector) are not comfortable with how it has been done.See jenben's contention that a lot of sins can be covered by drywall. The inspector won't open up the drywall or look behind anything to see what was done and how.
I'm still curious what the owners' motives for selling were and what remediation/remodeling steps are being taken. That they're not replacing the flooring, and depending on home construction, decking, seriously concerns me.
posted by SpecialK at 9:00 AM on May 26, 2011
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I don't know much about the financing but I would get either an accountant or lawyer who specializes with this stuff to look it over and advise you. You are making the biggest single purchase of your life and really do your homework.
Also if you are fairly handy you can really save a lot of money on the rebuild doing a lot of the work yourself. And if you do rebuild really look into alternative building technology like Structural Insulated Panels (SIPS) or Insulated concrete form (ICF) or even just superinsulated conventional framing.
Good luck and it might be the deal of a lifetime.
posted by bartonlong at 11:39 AM on May 25, 2011