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Buying a
Fixer-Upper? House Needs to be in Marketable Condition
by Henry Savage |
Question:
My wife and I have been looking for the right house to buy
for the last year or so. Property values have skyrocketed so
we have been searching for well-priced "handyman specials",
figuring we could buy at a good price and make improvements
ourselves, over time. We found the perfect house in a great
neighborhood for $230,000. Similar houses in the area are
going for nearly $300,000. The only difference is that this
house needs major cosmetic improvements. There are holes in
the plaster, the kitchen is outdated, and the siding is
falling apart. Need I say more?
At any rate, we figured we could improve the house over time
at very little cost with our own "sweat equity". We applied
for a mortgage of $184,000 with a 20 percent down payment.
The appraisal came in at $250,000 -- $20,000 over our
purchase price. But the lender is saying that the appraiser
noted a list of items recommended for repair. Now they say
that they won't make the loan unless we patch the holes in
the walls and repair the clapboard siding.
This seems ridiculous considering we're putting 20 percent
down and the property appraised $20,000 more than the
purchase price. We really want the house but can't afford to
make these repairs in the next 30 days.
Any advice?
Answer:
First of all, congratulation s on finding an undervalued
"fixer-upper". One of the best ways to build wealth is to do
what you're doing - buying an undervalued home in need of
some work and adding a little TLC. Your living conditions
may not be the best, but at the end of the journey, you will
very likely have a nice asset on your hands.
Now, let's get to your question. You're in a bit of a
Catch-22 situation. The lender won't lend you the money
unless certain repairs are made. You plan on making these
repairs but can't make them until you obtain your mortgage
and settle on the house.
The lender has one issue - "marketability". The job of the
appraiser is to not only valuate the property but also
inform the lender of the marketability of the property. The
lender is looking at a worst-case scenario. You default on
the mortgage and the bank ends up with the property through
foreclosure. The appraiser notes on his report that the
property is not in "marketable condition", meaning that the
home will not easily be sold until certain repairs are made.
Hello? Isn't that why you're buying the house? The price is
great for a reason - the house is in lousy condition so
nobody (except you) wants to buy it. But if the bank ends up
with the house through foreclosure, it can't easily sell the
house without repairs being made.
Herein lies the problem. The bank
is in the money-lending business, not the home improvement
business. The lender is scared to death that it will end up
with a piece of junk property that they can't get rid of
without spending a bunch of time and money on it. They don't
want to be in that business.
I acted as a mortgage broker in a very similar situation.
Let me tell you what I did.
" First,
I phoned my appraiser and told him I needed the property to
be appraised "as is". This means the value is not subject to
any repairs or improvements.
" Second,
I asked him what specific items he would be obligated to
list as "adversely affecting marketability" of the property.
It turned out that the appraiser was concerned with holes in
the dining room ceiling and broken gutters.
" Third,
I instructed the buyer to plaster the holes and re-attach
the gutters with the minimal cost and effort. It turns out
made the repairs at a cost of less than $100.
" The
appraiser then re-inspected the property and was able to
complete the report in "as is" condition and with no adverse
notations.
Basically, the buyer had to spend $100 and a little bit of
time to ensure that the appraisal report is not a red flag
to the lender. Remember that all appraisers are different.
If your appraiser is unwilling to work with you on these
issues, you should find a different appraiser. In my
experience, most appraisers will be flexible in what they
will note in the report.
Published: February 21, 2003
