Divest or encourage me with my fantasy!
May 29, 2012 9:13 PM   Subscribe

Lickety-split, down and dirty house-buying advice needed.

OK, so all of a sudden I find myself in need of new housing. I have this pipe dream -- I found a foreclosure for $45,000.00. In a great neighborhood that makes it an absolute steal . . . even if it does need a total rehab.

I'm a professional with a steady job and income, but I don't have a lot of money on hand. How do I go about selling myself to a mortgagor? (That's what I need to do, right?) Will anyone loan me money? How did you start the pre-approval process?

I'm looking at the house in the morning, and I understand from looking around the outside that's it pretty trashed. Rotten casements, broken windows, water damage, crumbling masonry. I will not entertain the idea further if it truly uninhabitable (by Board of Health standards, not by a fussy realtor's), but if it is remotely habitable it would be so sweet to make it shine again. Like I said, I have steady money coming in to manage hiring contractors as needed, but I have faith in myself that I can figure out most stuff except electrical work. When you bought your foreclosed castle, what did you do?

(I have a back up plan for a rental by mid-June, so just indulge me with this fantasy, because it if is at all possible, I just might try.)
posted by mibo to Home & Garden (15 answers total) 1 user marked this as a favorite
Just call your local bank branch and ask to talk to one of their loan representatives. They'll be able to tell you how their process works and what paperwork you'll need. Now, determining wether they will actually lend you money for this property is function of many things including but not limited to: your credit score, your cash flow, your outstanding debts, your job's stability . Just have a conversation with these people to get the ball rolling. For that matter, talk to a few different people because at this stage of the game there isn't any commitments.
posted by mmascolino at 9:22 PM on May 29, 2012

Using an inspector or (better) a civil engineer, you need to figure out how much it will cost to make the house livable. That's the real price of the house.
posted by goethean at 9:24 PM on May 29, 2012 [1 favorite]

If you have a steady income, you may not need a whole lot of money on hand to get a mortgage enabling you to buy a $45K house. Call a mortgage broker or loan officer and ask. They will probably give you a quick and dirty assessment of your likelihood of getting a mortgage over the phone.

To answer your specific questions, I don't think selling yourself is something to be concerned about (your application is really what you can put on paper and charisma can't make up gaps). It's unlikely you can get a loan to cover any portion of the down payment, but, again, the down payment may not have to be very large. Start by calling a mortgage broker. Your realtor can suggest names if you want. And all "pre-approval" is is a sheet of paper saying that you've spoken to someone about a mortgage without him laughing, it's not really a real thing.
posted by deadweightloss at 9:39 PM on May 29, 2012

Speaking from experience as a naive house-purchaser, it will be really difficult to get a mortgage for a house that is not habitable. When we were buying, we made a really good offer on a victorian house that needed foundation work. The bank wouldn't give us a mortgage until the work was done, and the sellers were not willing to put enough money into the house to please the bank. THe logic here is that the bank can't make its money back if you can't make this house livable, and therefore sellable. So the sellers of the house were really only interested in cash offers. They sold the house to someone else who offered considerably less money, but in cash and therefore without bank hassles.
Soooo, do you have cash on hand? Make an offer with that, and see if they are interested in taking a cash offer and walking away.
posted by pickypicky at 10:05 PM on May 29, 2012 [2 favorites]

Look into a HUD 203k loan. You can get construction money with the purchase loan. Both BofA and Wells Fargo offer them, though from what I hear, Wells Fargo does a better job as a lender.

If you want to hear any lessons learned the hard way, just ask. :)
posted by slidell at 11:04 PM on May 29, 2012 [2 favorites]

though from what I hear, Wells Fargo does a better job as a lender.

As a 203k lender, I mean. They request more documentation of the project's process and if I'm remembering right, may even offer more backup if things go wrong.
posted by slidell at 11:07 PM on May 29, 2012 [1 favorite]

My last comment: I just realized that you want to do the construction over time. If so, don't use a 203k loan. They hold back 10% of each reimbursement until the entire project is finished. They want the project finished relatively quickly, in maybe six months. If you'd rather pay as you go, then don't use them. However, consider questions like "if I have to spend $40k rebuilding the foundation, how many months will it take me to save that?" You may wish to have a general contractor bid the entire project so that you have a sense what the biggest costs will be.
posted by slidell at 11:18 PM on May 29, 2012

You have 12 months for a 203k loan and you don't have to do every last thing. Just get it to HUD standards.
posted by fshgrl at 11:57 PM on May 29, 2012

The key question on the mortgage is - what is the house's assessed value? They're not going to lend you $45k if the bank's assessor says its only worth $25k.

However, rebuilding an entire house is huge daunting task under the best of circumstances. You don't say if you (or a partner?) has any experience with construction or contracting, but anyone who's gone through it will tell you that it is fraught with many perils. Like: double the budget and double the timeline as a rule of thumb. And the older the house and more repairs needed the less predictable the cost. Even when you have some experience and a contractor you know and trust.

Please talk to someone who has gone through that experience before launching into it on your own.

If you are going to do it, then I would recommend doing it as one big project with one general contractor - who you will be trusting with your a big chunk of your financial future - responsible for the whole thing. Dealing separately with plumbers and electrical and floors and walls will drive you insane.
posted by RandlePatrickMcMurphy at 2:50 AM on May 30, 2012

If you are going to do it, then I would recommend doing it as one big project with one general contractor - who you will be trusting with your a big chunk of your financial future - responsible for the whole thing. Dealing separately with plumbers and electrical and floors and walls will drive you insane.

Just in case you failed to read this comment for content, please read it again. There's all the information you will ever need. The contractor can tell you after a cursory inspection what it's going to take to get to x, and what you can expect. It would strengthen your position with any lender from the beginning. Add twenty percent more time than the contractor requests, and probably 25% more money for contingencies.
posted by halfbuckaroo at 3:49 AM on May 30, 2012

First, have the house appraised, then inspected BEFORE you make an offer.

Is the lot alone worth $45K? If so, then it might be worth it.

My first condo in Florida was $45k and the note was $250 per month at 7% interest. Having such inexpensive housing was amazing, because I could use my money for other stuff.

I will warn you that a crumbling, wreck of a house could cost you a fortune and in the end you may put more money into refurbishing this house than you would in buying something twice as much money.

The other issue is that can you get it insured? No bank will take a mortgage on a house that an insurance company won't cover.

Frankly, if it's a stretch for you to buy this house, then I fear that you're not really in a position to deal with the realities of a re-hab. Have you ever done one? Do you know anyone who has?

I've done two and right now, I wish I had never bought the hutch Husbunny and I share now. We bought at the height of the market and spent all kinds of money on the world's least sexy projects. We're currently underwater. So far underwater on our house that if I didn't need a place to live, I'd back up the spouse and cats and get an apartment somewhere. Live and learn.

Here's what you think you'll do:

1. Paint the kitchen cabinets
2. Replace the vanity in the bathroom with a ready-to-install deal from Home Depot
3. Install Pergo floors
4. Tile the downstairs bathroom
5. Paint the walls

Here's what you'll actually be doing:

1. Upgrading the fuse box with a 200 amp electrical service
2. Digging up your lawn to replace the deteriorated clay sewer pipe
3. Changing out the outmoded PVC/Lead plumbing
4. Putting HardiPlank on the back of the house
5. Replacing Chinese Dry wall.

If you don't have money, you can't afford to be a home owner.

No matter how good the deal is, if you don't have a 20% down payment, your closing costs and a 6 month emergency fund, RUN, RUN from this nightmare!
posted by Ruthless Bunny at 6:25 AM on May 30, 2012 [3 favorites]

I can't speak to this personally, but a good friend just decided against buying into a major rehab because she felt that day-to-day the unfinished and crappy nature of her housing would really get her down. It may sound silly, but in addition to the monetary cost I think there can be a real emotional cost to the upheaval, especially if you're someone who needs stability and peace and quiet. So you might need to be very honest with yourself, on whether your general housing ambiance is really important to you. As others have said, remodels take at least 25% longer than you think they will -- are you ok with living in dirt and/or chaos for that long?
posted by lillygog at 6:32 AM on May 30, 2012

Rotten casements - these are a lot of work to replace.
broken windows - not bad to fix yourself
water damage - if it's plaster and lathe, plan on replacing it all, figure $2,000-$4,000 per floor for materials, another $5000 - $1000 in labor if you're not comfortable doing it yourself. Depending on how bad the water damage is on wood (is it still sturdy?) it might just be a cosmetic issue.
crumbling masonry - if that's the foundation, run. You don't have the funds or facilities to fix this.

Wifey and I did something much the same, but we walked away from "good deals" because of foundation, structure, and roof problems. We were honest with ourselves about what we could afford and what work we can do ourselves. I'm a very handy guy and all of the interior, wiring, plumbing I can do myself for cost of materials. Roofs, basements, and joists are all beyond my capabilities, so when we found a house that needed those, we walked away. When we'd have to repair or replace a basement, floors, walls, and roof, it'd be more efficient and cost-effective just to build a new house.

The house we found looked nasty inside, but the home inspector said the roof structure was good and not sagging, floors were sound, and the basement was good, so we borrowed $14,000 from the bank and bought it. Like you, we ran into the issue of how to get a bank to lend us the money. We have the benefit of having $14,000 in savings, and we used THAT as our collateral, not the house. We still make a "mortgage" payment, but when we're done not only do we have our savings back but we'll have a house.

Keep in mind: our plan is that we're going to put another $40,000 into it over the next three to five years, until it's ready to move in. Houses are spendy just on their own, not figuring in repair costs. For example: do you know what it costs each month just to keep the water and lights on, what garbage collection costs (you'll have to pay it even if you don't have garbage to go out), what your taxes are, what your homeowner insurance is in case lightning burns down your hard work? $20 here and $60 there and $100 there add up when you have to pay it on a monthly basis, whether you're working on the house or not.
posted by AzraelBrown at 8:03 AM on May 30, 2012

I am a real estate investor. I have bought a bunch of foreclosures recently. There really are some great deals out there.

In my experience, foreclosures have to be bought in cash. Banks do not want to finance these properties.

Also, in my experience, the really great foreclosure deals do not sit around for long. Investors, like me, snap up the good deals.

I hate to say this, but if you are in the market for a foreclosure deal, you have the process backwards - you need to get your ducks lined up first, then find a property. Not find a property, then try to fugure it all out.

What is getting your ducks lined up? 1. Get you money issue settled. 2. Get a contractor who can estimate repair costs for you. 3. Figure our the process of determining if their are any existing code violations with the city (lots of foreclosed properties have these violations, and banks are trying to pass them to unsuspecting buyers).

If you need immediate housing - settle that issue with a rental. Then set yourself to find a foreclosure deal. Rushing into the foreclosure market is not going to work out well.
posted by Flood at 8:09 AM on May 30, 2012 [3 favorites]

Response by poster: First: thanks so much for all the advice.

I took a look at it this morning. It is beautiful and it is trashed. Good news: the floors and ceilings are sound, the copper is all still there, the electric is OK, the foundation is OK, the plumbing is OK, the sump pump is new and 1/3 of the problem can be solved by bulldozing a half-ass wing addition. Bad news: almost all the window casements are rotted, which means that the casements, dry wall, studs and nearby floor boards need to be replaced. Also, one of the rooms upstairs reeks of animals and the carpet is soiled so badly that those floor boards probably need replacement as well.

I think I am going to explore a 203k with my bank this afternoon and make some calls to inspectors and engineers that I know to investigate. All of your advice is helpfully realistic, and I am prepared to hear "no" from the bank -- but at least I'll know instead of kicking myself wondering when I move into the studio I have lined up.
posted by mibo at 8:12 AM on May 30, 2012

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