Author Topic: Advice on Buying 1st Home ~ Needs $100+k in renos (case study - please help)  (Read 2278 times)

bjclifto

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Hi all,

I'm hoping for some advice around potentially purchasing our first home.  Here's some info:

- 34 years old, married, two young kids, no debt, still rent
- $281k in 401k, wife does not have this option through employer
- $67k in wife's traditional IRA (VTSAX)
- $31k in my roth IRA (VTIVX - Vanguard target retirement)
- $60k cash

The house we're looking at is in a desired area in northshore Chicagoland.  The assessed value of the home/land is roughly $350k, but it needs north of $100k in renovations.  Most of the comps around it sell for much higher and other homes in vicinity sell upwards of $750k+ due to it's proximity to public transportation and lake Michigan.  It's a 1960s cape code (1400 sq ft) and the person potentially selling it to us we've known for 10 years.  She's moving to a senior living facility and wants to sell it to us, but is stuck on the assessed value even though the house is probably worth $200k + the renovations.  We're hoping to purchase it from her directly instead of involving real estate agents and get the home for around $150k (family discount :), stress cost to fix up, etc).

I'm wondering, in your opinions since I have very limited knowledge when it comes to real estate, what are the best options to purchase and finance the renovations needed?
 - purchase the property with traditional 20% down and self-finance the renovation over time?
 - try to purchase all in cash (need to come up with more cash - get cash gift from relatives, borrow against IRAs, etc) and immediately get HELOC after to pay back borrowed money and fund renovations?

Please let me know if you need more information.  We're thinking we can hopefully get the house for under $200k, put money into it, live there for several years, and then sell north of $450k.



beltim

  • Magnum Stache
  • ******
  • Posts: 2884
The house we're looking at is in a desired area in northshore Chicagoland.  The assessed value of the home/land is roughly $350k, but it needs north of $100k in renovations.  Most of the comps around it sell for much higher and other homes in vicinity sell upwards of $750k+ due to it's proximity to public transportation and lake Michigan.  It's a 1960s cape code (1400 sq ft) and the person potentially selling it to us we've known for 10 years.  She's moving to a senior living facility and wants to sell it to us, but is stuck on the assessed value even though the house is probably worth $200k + the renovations.  We're hoping to purchase it from her directly instead of involving real estate agents and get the home for around $150k (family discount :), stress cost to fix up, etc).
Ö
Please let me know if you need more information.  We're thinking we can hopefully get the house for under $200k, put money into it, live there for several years, and then sell north of $450k.

There's nothing in this that suggests $150 or even $200k is a fair price.  The assessed value is higher, the comps are "much higher", and with 100k renovations you think it would sell for more than $450k.  How did you get to a value of 200k?

bjclifto

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Thanks for the note, @beltim.  My wife and I had one of her contractor friends visit the property as well as an architect who has bought properties in that are mention that $150k-$200k is general ballpark based on the amount of work that needs to be done.

YttriumNitrate

  • Pencil Stache
  • ****
  • Posts: 867
  • Location: Northwest Indiana
It's a 1960s cape code (1400 sq ft) and the person potentially selling it to us we've known for 10 years.  She's moving to a senior living facility and wants to sell it to us, but is stuck on the assessed value even though the house is probably worth $200k + the renovations.  We're hoping to purchase it from her directly instead of involving real estate agents and get the home for around $150k (family discount :), stress cost to fix up, etc).

Your price is half of her price, so one of you is going to have to significantly change their expectations. With that big of a gap, I would suggest that your friend should try listing her house for a few months. A 90-day agreement with a realtor would get her most of the way through the Spring selling season. If the house sells for $350k, that's great since your friend has $100k+ more than what you would have paid. If it doesn't sell then your friend will be more likely to consider your offer.
« Last Edit: February 09, 2020, 07:43:35 AM by YttriumNitrate »

ixtap

  • Handlebar Stache
  • *****
  • Posts: 1889
Get it out of your head that you get a "family discount." This is also known as elder abuse, especially when the person selling wasn't the one to bring up the discount in the first place.

Get an actual appraisal. Talk to real estate agents and/or hire an inspector and/or appraiser. Again, this is to protect you from accusations of elder abuse, as much as it is to be fair to both sides.

If you can agree to a price and move forward, do not start playing a shell game by begging for money from family with promises to pay them back with a loan that will magically be big enough to pay them back and fund the renovations.

Malkynn

  • Magnum Stache
  • ******
  • Posts: 2690
If the house was appraised for 350K, then presumably, that accounts for the 100K in renos needed, which would explain why it's projected to sell for 450K+ after the renos are done.

I can't fathom how <200K is a fair offer.

bjclifto

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Thanks for the information; this is helpful.  It's a somewhat unique situation as she's close to our family and wants to sell us the house and is aware that we can't afford the home for $350k.  Can anyone point me to resources/tools related to financing options?  Is it best to come up with as much cash as possible and then get HELOC or would you take approach of putting 20% down and then just funding the renovation over time?

YttriumNitrate

  • Pencil Stache
  • ****
  • Posts: 867
  • Location: Northwest Indiana
Is it best to come up with as much cash as possible and then get HELOC or would you take approach of putting 20% down and then just funding the renovation over time?

I would fund the renovations over time because it will give you time to find out what actually needs to be renovated and what would just be kind of nice.

Sandi_k

  • 5 O'Clock Shadow
  • *
  • Posts: 49
  • Location: California
Thanks for the information; this is helpful.  It's a somewhat unique situation as she's close to our family and wants to sell us the house and is aware that we can't afford the home for $350k.  Can anyone point me to resources/tools related to financing options?  Is it best to come up with as much cash as possible and then get HELOC or would you take approach of putting 20% down and then just funding the renovation over time?

Our first house was an early flip before flips were common; the seller had bought it 4 months prior as a probate sale, and hadn't done much except slap a (bad) coat of white paint on everything - including door hardware! - and sodded the front yard.

We had done our homework, and knew that 3 bedroom houses with a garage and basement were selling for $175k. He had priced it a $150k for a fast sale, and we offered full price. He accepted.

We put down 10%, and inspected it, so we knew what it needed. And it needed a LOT, including structural support work (a pillar in the basement had been removed, and the upper floor was now bowed by 1.5" across 40').

We used the other 10% for immediate repairs, and income every year for 15+ years to get that house renovated.

It will be hard for you to get a mortgage AND a HELOC right away, and you'll pay more for the HELOC than you will for the mortgage. I'd recommend holding back 10%, and seeing if you can get a 90% loan with no PMI. Then use that 10% to improve the place in the first year. If you're smart and values are increasing, you can then refinance, and capture that additional equity based on your renovations starting in Year 2 or 3.

ixtap

  • Handlebar Stache
  • *****
  • Posts: 1889
Thanks for the information; this is helpful.  It's a somewhat unique situation as she's close to our family and wants to sell us the house and is aware that we can't afford the home for $350k.  Can anyone point me to resources/tools related to financing options?  Is it best to come up with as much cash as possible and then get HELOC or would you take approach of putting 20% down and then just funding the renovation over time?

Your OP sounds more like they think "it would be nice to sell to you, but unfortunately, you can't afford it."

Lucky13

  • Stubble
  • **
  • Posts: 116
  • Age: 44
  • Location: Seattle, WA
Unless you're a contractor this seems like a major fixer project... if you're looking for this sort of thing, then great, but then you might want to check out similarly in-need-or-reno homes to get a comparison. Can't tell from your post if you've been shopping around already or if this is the first place you've seriously considered.

Malkynn

  • Magnum Stache
  • ******
  • Posts: 2690
Thanks for the information; this is helpful.  It's a somewhat unique situation as she's close to our family and wants to sell us the house and is aware that we can't afford the home for $350k.  Can anyone point me to resources/tools related to financing options?  Is it best to come up with as much cash as possible and then get HELOC or would you take approach of putting 20% down and then just funding the renovation over time?

She's a good enough family friend that she's willing to give you 200K??

bjclifto

  • 5 O'Clock Shadow
  • *
  • Posts: 15
My wife works with contractors so we should be able to get some better pricing for the renovation.  Getting the house for <=$200k would be great, but we'll see what she'll be willing to sell for as she's close with our family.  What are thoughts on putting less down (5%) and just funding portion of renovation with liquid assets?  Or does it make sense to put 20% down and seek a construction loan?

Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1336
  • Location: Ohio
Itís called a 203k loan. 

But for 100k I can redo 2 of your places.   Like full on gut job, mechanicals replaced, etc. Wtf does this place need? You putting in gold bathtubs?


Sent from my iPhone using Tapatalk

affordablehousing

  • Bristles
  • ***
  • Posts: 423
If you can get that good a deal, good on you! I don't understand why there's all this hate from people trying to prevent you from taking this woman's asset for a song. That's called real estate! Learn as much as you can about construction and understand you're taking on another job managing this construction project. Just buy the house with a normal loan, pay cash for the renovation, and get the cheapest labor you can find and do it bit by bit.

ncornilsen

  • Pencil Stache
  • ****
  • Posts: 912
My wife works with contractors so we should be able to get some better pricing for the renovation.  Getting the house for <=$200k would be great, but we'll see what she'll be willing to sell for as she's close with our family.  What are thoughts on putting less down (5%) and just funding portion of renovation with liquid assets?  Or does it make sense to put 20% down and seek a construction loan?

if she's moving to a senior living facility, is she expecting any help in paying for it?

If so, selling it to you for anything but an arms-length price will end up screwing HER over, from what I understand.


Fuzz

  • Bristles
  • ***
  • Posts: 371
Thanks for the information; this is helpful.  It's a somewhat unique situation as she's close to our family and wants to sell us the house and is aware that we can't afford the home for $350k.  Can anyone point me to resources/tools related to financing options?  Is it best to come up with as much cash as possible and then get HELOC or would you take approach of putting 20% down and then just funding the renovation over time?

Dude - you have over $400K in retirement accounts and cash, no debt and you're 34. You can "afford" a house for $350K, even if you don't want to pay $350K. If you want to get a friend discount, great.  But the senior going into assisted living should look at Medicare clawbacks, or whatever it's called. If the senior plans to use Medicare to pay for assisted living it can get pretty complicated pretty quickly. The Feds take a dim view of a senior voluntarily impoverishing herself right before going on Medicare. Again--I don't have information that is the plan, but that's how a high percentage of folks pay for assisted living.

NaN

  • 5 O'Clock Shadow
  • *
  • Posts: 69
Seems like a disaster. If this family friend is so nice how about sell it for market value and then give you cash to potentially afford a house that doesn't need so much work? This seems weird to me, and whether it is elder abuse or not, it seems like taking advantage of someone making a poor financial decision.

dd564

  • 5 O'Clock Shadow
  • *
  • Posts: 51
If you are looking to put $100k into a 1400 sq ft house, the better option in all likelihood is to bulldoze it and build a 3000 sq ft house where it stands. (Or demo it all down to one remaining wall and "remodel".

Most of the value of the home is probably the land it sits on, and 1400 sq ft seems small to do a reno on.


So the real issue becomes, are you going to buy a house from someone who loved it, as it was, an go ahead a knock it down? 
Some people would have problems doing this to a family members house, others would have no issue with it.


ixtap

  • Handlebar Stache
  • *****
  • Posts: 1889
If you are looking to put $100k into a 1400 sq ft house, the better option in all likelihood is to bulldoze it and build a 3000 sq ft house where it stands. (Or demo it all down to one remaining wall and "remodel".

Most of the value of the home is probably the land it sits on, and 1400 sq ft seems small to do a reno on.


So the real issue becomes, are you going to buy a house from someone who loved it, as it was, an go ahead a knock it down? 
Some people would have problems doing this to a family members house, others would have no issue with it.

Unless someone actually wants a reasonable size home, rather than a McMansion.

dd564

  • 5 O'Clock Shadow
  • *
  • Posts: 51
If you are looking to put $100k into a 1400 sq ft house, the better option in all likelihood is to bulldoze it and build a 3000 sq ft house where it stands. (Or demo it all down to one remaining wall and "remodel".

Most of the value of the home is probably the land it sits on, and 1400 sq ft seems small to do a reno on.


So the real issue becomes, are you going to buy a house from someone who loved it, as it was, an go ahead a knock it down? 
Some people would have problems doing this to a family members house, others would have no issue with it.

Unless someone actually wants a reasonable size home, rather than a McMansion.

I think the average home size is about 2400 sq ft.

My advice was from an "increase your net worth" standpoint.
Bigger houses are definitely in greater demand than 1400 sq ft houses.
Building a 2,500 or 3,000 sq ft home in a desirable neighborhood could provide values of $1,000,000 instead of rehabbing a fundamentally obsolete house by dumping $100k into it.

I understand MMM is about minimalism, but the nature of the post of buying and remodeling would be a reason to provide a better financial answer vs a more minimalistic answer.


Malkynn

  • Magnum Stache
  • ******
  • Posts: 2690
If you are looking to put $100k into a 1400 sq ft house, the better option in all likelihood is to bulldoze it and build a 3000 sq ft house where it stands. (Or demo it all down to one remaining wall and "remodel".

Most of the value of the home is probably the land it sits on, and 1400 sq ft seems small to do a reno on.


So the real issue becomes, are you going to buy a house from someone who loved it, as it was, an go ahead a knock it down? 
Some people would have problems doing this to a family members house, others would have no issue with it.

Unless someone actually wants a reasonable size home, rather than a McMansion.

I think the average home size is about 2400 sq ft.

My advice was from an "increase your net worth" standpoint.
Bigger houses are definitely in greater demand than 1400 sq ft houses.
Building a 2,500 or 3,000 sq ft home in a desirable neighborhood could provide values of $1,000,000 instead of rehabbing a fundamentally obsolete house by dumping $100k into it.

I understand MMM is about minimalism, but the nature of the post of buying and remodeling would be a reason to provide a better financial answer vs a more minimalistic answer.

If you are looking to put $100k into a 1400 sq ft house, the better option in all likelihood is to bulldoze it and build a 3000 sq ft house where it stands. (Or demo it all down to one remaining wall and "remodel".

Most of the value of the home is probably the land it sits on, and 1400 sq ft seems small to do a reno on.


So the real issue becomes, are you going to buy a house from someone who loved it, as it was, an go ahead a knock it down? 
Some people would have problems doing this to a family members house, others would have no issue with it.

Unless someone actually wants a reasonable size home, rather than a McMansion.

I think the average home size is about 2400 sq ft.

My advice was from an "increase your net worth" standpoint.
Bigger houses are definitely in greater demand than 1400 sq ft houses.
Building a 2,500 or 3,000 sq ft home in a desirable neighborhood could provide values of $1,000,000 instead of rehabbing a fundamentally obsolete house by dumping $100k into it.

I understand MMM is about minimalism, but the nature of the post of buying and remodeling would be a reason to provide a better financial answer vs a more minimalistic answer.

If OP can't afford the home at 350K, I doubt they can afford to buy the home as it is, tear it down, and build one more than double the size.

It sounds more like OP is seeing this as an opportunity to get into an expensive housing market that they can't otherwise afford without this extremely generous $100-150K family discount.

bjclifto

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Thanks for all the input.  Yea, because she's like family and based on the land it sits on there's some zoning that doesn't allow us to build a huge home.  I see the point to build a large home to make more money, but we will also be able to finish out the basement to add some square footage.

We came to an agreement in the last two days to purchase the home for $250k.  The assessed value on the home came back at $350k so it seems to sill be a good deal.  We will just need to be cognizant on how much we put into the renovations and what those returns will look like.

Financing question - if we decide to put 20% down I'm guessing a 5/1 ARM might be a good plan since we will initially do the bulk of renovations and then refinance to conventional?
« Last Edit: February 20, 2020, 08:40:58 PM by bjclifto »

bjclifto

  • 5 O'Clock Shadow
  • *
  • Posts: 15
Financing question (continued) - or do we only put 5-10% down, use the the extra cash for renovations and then refinance?