Fixer Uppers
Financing a Fixer Upper
By Buyincomeproperty.com
Oct 28, 2005, 11:58

Are you discouraged because you’ve just found the house of your dreams but it’s a fixer upper from Hell? If you’re worried about how you could possibly afford all the changes and upgrades, don’t despair just yet.

You could actually buy the house with no money down and finance all the improvements into your mortgage loan. The key is having a good appraisal on your fixer upper and a good banker willing to work with you.

When an appraiser reviews a piece of property, he or she is evaluating the market value of that property. But an appraiser may evaluate your fixer upper two different ways – as is, and as it could be. You may need to ask your appraiser to give you both estimates. The as-is quote will give you an idea of a reasonable offer to make when purchasing the fixer upper. The usually higher as-it-could-be estimate is what will help you finance the renovations to your fixer upper home.

For instance, you’ve spotted a fixer upper home that needs quite a lot of work. You know that the other homes in the neighborhood are valued at about $150,000 (you can check the appraisals of any home at your county’s tax assessor’s office). But this fixer upper needs a lot of work. Right now it’s no where near worth $150,000. An appraisal of worth as-is will help you tremendously by giving you a documented estimate of current worth.

When the bank receives the as-it-could-be estimate, they see the potential of your fixer upper. Your personal banker will help you find an appropriate loan. If you meet certain guidelines – if your income is high enough but not too high – and if the fixer upper you want to buy is in the right area, you might qualify for a U.S. Department of Agriculture rural development home loan. There are other loan programs your banker can find for you, too. If the amount you offer the seller for the fixer upper is low enough, you can finance almost all of the amount of repairs up to the higher appraisal of potential worth.

It may sound too good to be true, but it can happen. People use this method to buy fixer upper homes every day. The only pitfall is that your bank will likely require all the repairs to be completed before you can sign closing papers on your fixer upper. And whatever your appraiser says must be done will be included in addition to any repairs you want to make.

For instance, you see that the living room and bedrooms of your fixer upper need new carpet or wall covering. The loan you’re applying for will almost certainly guarantee flooring be in place before you can sign papers to move in. However, what you might not see is that the attic insulation doesn’t meet local code, you need storm windows and doors, and drainage around the exterior of the house needs correcting. Talk about a fixer upper! If your appraisal says your fixer upper will be worth $150,000 once those projects are complete and you are trying to borrow that much, you will certainly have to make all those improvements in order to get your loan.

The tasks may sound daunting, but proceed by pricing them all out. See how much of the work you can do yourself. You might be able to make all the required improvements along with your preferred renovations quite inexpensively. With a little luck, you’ll be able to buy the fixer upper house at a great price, make most of the improvements yourself without having to spend a lot on labor and still buy the house and its improvements for less than the top appraisal amount. A fixer upper like that is one heck of a deal!