With the presence of all of the home improvement and flipping shows on television, it’s easy to succumb to the allure of buying a fixer-upper, making some changes to the home and then realizing a potentially amazing profit or finding yourself living in your dream home. Unfortunately, when the truth be told, renovations can turn out to be a disaster at least as often as they’re successful, if not more. So, this begs the question: When is buying a fixer-upper a good idea?
Look at the price discrepancy between the house and comparable properties.
Renovating can be a great way to add value to a home if you buy it somewhat or significantly below market value. The trick is to not spend more on renovating than the home is worth. A good way to determine how much that might be is to look at the price discrepancy between the home you want and comparable properties.
If similar properties are going for $50,000 more than your home, you conceivably have a $50,000 budget to work with before you exceed your home’s value. If you spend more than that, you risk pricing yourself out of the market if and when the time comes to sell.
Price out home improvement projects ahead of time.
Don’t just assume that $50,000, for example, is a lot to work with. Some renovations cost significantly more than others. Don’t estimate; get a professional contractor’s opinion and budget for the home improvements you’re considering. If possible, have several contractors visit the home and provide bids for you based on the work you want to do. A contractor may be able to spot potential problems before you start, and can give you a much more accurate idea of your cost than any estimate you’re able to make on your own.
Get a thorough inspection by an experienced professional.
Even if something looks good on the surface, and you’ve got plenty of budget to make the improvements you need, you may still find yourself running into trouble once you begin your project. Get a thorough inspection by an experienced professional before you decide to buy and renovate. Inspections can turn up vital facts, like faulty electrical systems, plumbing that needs to be replaced or even problems with the foundation or roof. These vital issues must be corrected first and foremost, and can eat up a substantial portion of your budget when buying a fixer upper, so make sure you know what you’re getting into before you buy this type of home.
Not only is it important to check your credit report before you start shopping for a home, but you should give yourself months to fix items on your credit report. Some people assume that if they find an error on their credit report, they can fix it in a matter of days. This simply isn’t true. In most cases, it takes anywhere between three to six months to fix or clean up your credit report. Nothing on your credit report is an overnight fix, so give yourself time to clean things up.
The Dispute Process is Slow
Most people don’t realize it until they do it, but the dispute process is slow. In the best case scenario, you may be able to contact the creditor directly to resolve an issue, and get them to agree to contact the credit reporting agency. In theory, with some reporting agencies, this type of correction can show up within a few days. In most cases, however, creditors repopulate their data with the reporting agency once a month, so any changes may not even go to the reporting agency for a month or more. And that’s if the lender cooperates and agrees with you.
If you file a dispute with a reporting agency, a lender has 30 or 45 days to respond to the dispute. Reporting agencies are required to send you written notification about the result of the dispute within five days, but it may not be the result you want. The Federal Trade Commission says that consumer complaints about credit reporting allege that it takes an average of six months to resolve credit disputes.
Also, keep in mind that a change to your credit report may not make an immediate impact on scores. In most cases, correcting erroneous information or removing a negative item may result in an immediate boost, but some fixes require a few months or more to make a positive impact on your credit rating. So give yourself time to make the changes and improvements you want to your credit score before you begin shopping for a home.
Home sellers and home buyers often have far different ideas of the value of a home. Sellers are almost always asking as much as possible for their home, and buyers typically have a good idea of the home’s actual value, based upon the research they have done. How do you bridge the gap between buyers and sellers to get the home you want at a reasonable price?
Seller’s Syndrome: High Asking Prices.
It’s human nature for sellers to want to get the highest possible price for their homes. They may look at the housing market and decide that because their home is in better shape than some of the comparables, or the outside has been painted more recently, or has some otherwise relatively intangible benefit, it’s worth asking for more money. Some agents also tell sellers to ask high prices in order to leave room for negotiation. In reality, high prices can just put off buyers.
Buyers have a better idea of realistic values.
Buyers are typically better-educated than sellers, because they’re looking at multiple homes in various neighborhoods and have a good sense for comparable properties. Sellers don’t have to be overly educated; they typically rely on their real estate agent to convey value and other important property information. Buyers, on the other hand, often do a lot of homework, and know what they’re willing to pay for comparable properties.
Meeting in the middle: where buyers and sellers agree.
In theory, the price where buyers and sellers agree is the fair market value. Fair market value is what the buyer is willing to pay, so it’s a fairly arbitrary number and only depends on the buyer and seller. In reality, the fair market value is typically a bit higher than buyers want to pay, and somewhat lower than sellers want to sell. Be prepared to educate sellers, including providing information on comparable properties and your financial resources, in order to get the deal you want. You might have to compromise and meet in the middle.
It’s time to revisit one of the great benefits of home ownership that most first-time buyers don’t know about: tax benefits! That’s right; when you buy a home, you’re eligible to take certain deductions and exemptions as a homeowner. These deductions can save you a ton in taxes, so if you’ve been thinking about pulling the trigger on a new home purchase, 2012 might be the year for you to do it!
Mortgage Interest Tax Exemption
Home mortgage interest payments are tax-deductible if you itemize your deductions. This means that you don’t have to pay taxes on the portion of your income that goes toward home mortgage interest. You can also deduct interest on a certain amount of equity debt, which means that the money you pay for interest on your home equity loans, which you might have used to pay for improvements to your home, a new vehicle or your child’s education, are tax deductible. The IRS changes the deductible amounts from time to time, so check with your tax preparer to determine the current deduction you’re eligible to take on your home mortgage interest.
Sell Your Home and Earn Tax-Free Income
If you’ve owned and occupied your primary home for at least two of the past five years, the IRS also allows you to earn up to $500,000 on the sale of your home – tax free. Singles get up to $250,000 tax free. This means that if you buy a fixer-upper home, put in some work, live in it for two years, and sell it for a tidy profit – you get to keep the income for that sale tax free! This is a great way to earn a deposit on a larger home – particularly for first-time buyers – or to earn tax-free income you’ll use to start a business, pay for your child’s education or spend in other ways.
A refinance can be a valuable tool for you to lower your mortgage payments, reduce the amount of money you pay for your home and lock in a lower interest rate. But a mortgage refinance may not always be the best solution for your financial needs. Refinancing your loan does cost money, and you may be able to meet your goals better through other means. Do the math before you refinance to make sure it’s the right decision for you.
What are You Trying to Accomplish?
First, sit down and determine exactly what you’re trying to accomplish when you refinance your home. Is your goal to lower your mortgage payment? Do you want to pay less on the total cost of your loan? Are you trying to get money out to pay off credit cards and other high-interest debt? List your goals, and make sure refinancing will help you reach them. Keep in mind that refinancing does have a cost, and if your goal is relatively modest, you may be better off to utilize other financial resources to meet your needs.
Is There a Better Way to Meet Your Goals?
A refinance will typically cost you several thousand dollars. A mortgage lender may be willing to roll this amount into your loan, but then you’ll be paying even more in the long term in interest on that principal. Evaluate the cost of a refinance and make sure it’s a cost-effective way to reach your goals.
Another Option: “No Cost” Refinances
If you are concerned about the costs associated with refinancing, check with your lender about a “no cost” refinance. Instead of rolling the costs of the refinance into the loan amount or paying them at closing, your lender will pay them for you at closing in return for your accepting a higher rate over the life of the loan. For Example, your rate may currently be at 5.375% fixed on a 30 year term. The normal, standard full closing cost rate on a refinance maybe at 4.0%, but your lender may offer you a chance to refinance your balance outstanding, without having any money added to the loan, for a rate of 4.625%. So, although this rate is not as low as the “best” rate, it would be better than your current situation and allow you the opportunity to take advantage of this without any cost to you, or maybe the minimal cost of an appraisal and credit report at the most.
It is good to talk to a trusted lender who can evaluate all of your options when considering a refinance to make sure there is an option available that makes sense for your particular situation.
Posted July 25, 2014on:
Title rules and laws vary in different states, and sometimes even from county to county within your state. Before you close on your home, get to know the title rules and laws in the county where your property is located. Find out if there are any exceptions or little surprises that could be waiting for you even on a clear title. Ask you Real Estate Agent for any special title situations that can arise. Consult a legal specialist, and find out explicitly if there are any potential infringements on a title. In some parts of the country, what may be a clear title issue elsewhere warrants little more than a passing glance. Know what title rights you’re getting, and what issues or discrepancies you may be buying into.
Familiarize Yourself with Methods of Verifying and Conveying Title Quality
Title searches and other methods of verifying and conveying title quality vary from state to state, and even locality to locality. The legal description may be out of date; the neighbor may be in violation of property lines or utility easements or other discrepancies may not raise a red flag in some localities. You must find out for yourself what constitutes “title quality” where you’re buying your home, because the discrepancies from county to county could mean you’re missing 20 feet of land, don’t have right-of-way access to a part of your property or have some other issue with your purchase.
Ask about the Limitations that can Disappoint Buyers
Ask your legal professional explicitly about the limitations in title quality that can disappoint buyers. In some places, title quality may not include the fact that the neighbor’s garage is two feet over your property line, although that can make a difference in your enjoyment of the property. Find out from your attorney about the sources of error or omissions that can disappoint buyers. Know what property rights you’ll be receiving, and the exceptions you might be facing. Your real estate agent can also help you with this and as an alternative, you can have a survey completed as part of the purchase process if there is any doubt as to where the true property lines of your new home are located.
During a divorce, division of community property is typically a big issue. Community property is considered almost anything the two of you acquired while you were married. Exceptions may include gifts, personal injury payments or any inheritance received during the marriage. Anything either of you owned before you got married is personal property and is not subject to be divided.
If you bought a house together after you got married, as most couples do, it falls under the heading of community property, as does any business either of you may have started. Typically, the home is the greatest piece of community property and as such, is often a point of contention for couples seeking divorce.
The biggest decision concerning the house is whether one of you will keep it and continue to live in it or if you’ll be selling it and dividing the proceeds of the sale. If there are children in the marriage, the burden of making this decision can become even heavier, since their needs will have to taken into consideration as well in this process.
Your home represents, not only financial value, but in many cases, emotional or sentimental value that may weigh more heavily than any potential monetary gain. Ideally, you and your spouse will be able to come to an agreement as to the disposition of the house. Otherwise, the court will make the decision for you.
If you choose to keep the house, you’ll have to buy out your soon to be ex-spouse’s interest in it and typically set up a new mortgage under your name. It’s important to consider whether you’ll be able to maintain the payments and the upkeep on the house once the divorce is final based on your income alone.
Whatever decision is made on whether to keep or sell the house, you must keep in mind that you are jointly bound by a legal contract to pay off the mortgage and a divorce settlement does not, in any way, change this contract with the creditor. Any amendments in the mortgage agreement can only be made with the agreement of the creditor. The creditor, in order to safeguard his investment, seldom permits this.
You should seek the advice of a mortgage professional, your attorney, or a financial divorce specialist. Each state has different laws and every divorce occurs under different circumstances. Your particular situation will need to be evaluated by someone familiar with the applicable laws of your state and your unique circumstances.
If neither spouse wants to keep the house, or if neither of you can afford to pay for it on your own, it’s probably in your best interest to sell it and share whatever profits the sale brings. This would have to be agreed on by both parties. Some states even have automatic procedures in place that prohibit the sale of the house without approval from each spouse or from the court.
There are also good reasons for a spouse wanting to keep the house, especially if children are involved. It provides them a place of continuity during an extremely emotional, stressful and upsetting time. If the house originally belonged to family members, that may also sway the decision not to sell it.
On the other hand, it may be too emotionally painful to remain in the house you occupied during happier times. Even the children could possibly benefit from a ‘fresh start.’ This may be a good time to consider downsizing from a large house with a hefty mortgage to something smaller and more affordable. Spend some time re-evaluating what your new needs will be. You may discover that the marital house served its purpose, but no longer makes sense for you to keep it.
There are many factors to be considered when deciding what should be done with the house in a divorce and only an expert can give you the tools you really need to make an educated and informed decision.