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The Money Pit: How To Keep Your House From Stealing Your Soul

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In the Tom Hanks movie The Money Pit, Hanks’ character, Walter, and his girlfriend, Anna (Shelley Long) agree to buy a “fixer-upper” mansion, for what they believe to be a steal. Unfortunately, the house is in shambles, falling apart all around them – and they’re forced to deal with the extensive repairs.

Yes, it’s a movie, but the real-life scenario does happen often. Don’t be fooled into thinking that you’ll always make a huge profit by buying a less-than-modest house at a super low price, fixing it up, and selling it at or above market value. (Remember: The housing market is currently at an all-time low, having fallen 16.9% in February.) Still, your investment could potentially yield profits if you’re smart.

So, how should you go about it?

Choose Wisely

First, you’ll need to pick your location–as well as the configuration of the home–carefully. Don’t pick homes that are next to busy streets or schools, or in deteriorating neighborhoods where overall home price is steadily decreasing. A 3-bedroom with more than one bathroom will appeal to the biggest pool of buyers, so that’s probably your safest bet as an investor and seller. Be prepared to search extensively. Look in the newspapers for buzz words like “handyman special” or “needs a little TLC.” Ask long-term residents for insights about the current state of the neighborhood. Don’t forget to look around and see if the other homes are well-kept.

Get A Home Inspection

If the house needs significant structural repairs – roof repairs, electrical re-wiring, or foundation upgrades – then you probably want to avoid it altogether. Why? It’s likely that you won’t make back the money on your investment. If your state allows inspections before the purchase is made, then hire a qualified home inspector to take a look before you sign the contract. A roof certification, a soil, seismic, and a pest inspection are worthwhile as well, if you can persuade the seller to pay for them. You can then use the inspector’s report to negotiate the home price down.

To stay on the safe side of a potentially risky investment, try to look for homes that require only cosmetic fixes like new paint, new flooring, new light fixtures, or new windows.

Do The Math

After a thorough assessment of the house has been made, it’s time to crunch numbers. If possible, get a formal appraisal of the home’s current value. Get estimates from contractors on materials and labor costs for proposed renovations. Don’t forget to include permit fees and check zoning requirements, as well. (Deduct another 10% for last-minute additions or unforeseen expenses.)

Once the assessment is complete, place a bid at a price about 20% lower than the home’s value would be after the renovations. Make sure that your estimated post-renovation price won’t be higher than the other houses in the neighborhood — the National Home Builders Association suggests that resale price shouldn’t be more than 10-20% above the median price of nearby homes.

Figure Out How You’ll Finance It

Financing the repairs is one of the most difficult parts of the entire process. Consider a renovation loan through home equity or mortgage (home equity lines of credit can typically be borrowed against 90% of the equity of your home after repairs.) It’s also possible to get a loan through your mortgage, with the same requirements; however, a mortgage-based loan’s interest is tax deductible. Low-interest government loans might  be an option too. FHA 203K loans, as they’re named, only require a 3.5% down payment from the borrower, and, since they’re meant to be accessible to as many people as possible, they require only a low FICO score of 620 (and you’ll get the same low interest as borrowers with better credit.) There are always personal loans to go after, if you are creditworthy borrower and need up to $35,000.

Do It Yourself

You’ll save the most money on repairs if you pitch in and do some of it yourself. If you can nail shingles, do some re-plumbing, paint, hang cabinets, or replace windows, you’ll be in much better shape financially when it’s time to sell. Otherwise, be prepared to spend a significant amount of time, usually months or even years, closely supervising the work of contractors.

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