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Last Updated: May 14th, 2012 - 22:24:01 |
We have seen all the methods outlined for reducing the cost of home purchase and obtaining an adjustable mortgage, insuring a low down payment with PMI, obtaining a 15-year mortgage, prepaying principal, using a portfolio lender and careful comparison shopping have become well established practices. However, none of these methods may be sufficient if: (1) you can't afford a conventional home, (2) you don't have enough money for a down payment or (3) you don't have enough income to qualify for an institutional loan. These cases call for more radical purchase techniques. In fact, even if you can qualify for an institutional loan on a conventional home, creative home buying may yield a better deal!
Bargain Homes
The risk in buying a cheap home is that it may be even cheaper by the time you decide to sell. This is known, in sophisticated real estate jargon, as a lousy deal. However, by observing certain precautions, you can minimize the inherent risk in buying an inexpensive home. We shall examine five sources of cheap homes: condominiums, foreclosures, fixer-uppers, new homes, and pre-market homes.
Today we will start with Condominiums.
Condominiums
The unfortunate experience of a friend of mine exemplifies the perils of purchasing a condominium. Nancy found an ideal condo for herself-great financing, low down payment, beautiful design, swimming pool, hot tub, sauna, and close to her work.
As she was moving in, a neighbor came over to greet her. ¡°You aren't actually moving in, are you? questioned the neighbor. Do you know what's going on here? Nancy then listened as the neighbor elaborated on one horror story after another. The builder had run into financial troubles. A third of the condominium complex would remain unfinished for an indefinite period of time. Of the two-thirds that was complete, the builder was renting the vacant units, instead of selling them (property values tend to plummet if over 20% of the unites are rented). Nancy asked if the lender might bail the builder out of this fix. No, because the finance company itself had just filed bankruptcy!
Nancy spoke to other member of the condominium. One resident after another told stories of inadequate sound insulation, noise from airplanes (the complex was built in the flight path of the local airport), swimming pools never completed, inadequate hot water (the water heaters were sometimes 100 feet from the units they serviced), poor mail service (the developer hadn¡¯t supplied mail boxes), and a long fight with the developer just to get lawn furniture for one of the outdoor common areas. When she asked one resident what he was going to do, the answer was simple: ¡°Move as soon as possible.¡±
You can avoid Nancy¡¯s dilemma by doing a little research prior to purchasing a condominium. The primary complaint of condominium owners is poor construction, especially inadequate sound proofing between adjoining condos.
To check the building's insulation, ask neighbors above, below, and to the sides to turn on a TV or stereo and listen from inside your unit. Also, ask the condo owners association about any other structural problems. The owners association can also provide you with its latest financial statement.
Unless a portion of the monthly maintenance fee is set aside to cover emergencies, expect a large special assessment when a major repair becomes necessary. Because nonresident owners want to keep monthly fees at a minimum, maintenance quality decreases in direct proportion to the number of rented units. Carefully examine the maintenance of both the building and common area.
In a new building, determine how many of the units have sold. As many frustrated condo owners will testify, the developer still owns, the developer has one vote in the condo owners's association.
You do not want a developer who is losing money as a general partner in building maintenance and management. Furthermore, you do not want to compete with unsold new units when you decide to sell your condo.
Condominiums appreciate slower than single-family homes. Nevertheless, condominiums make excellent starter homes. Just be sure to thoroughly investigate the complex before you buy.
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