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Financing a Fixer Upper ProjectIs the Fixer Upper Life Right for You?
First, you need money. Not every bank has the expertise to successfully underwrite fixer upper loans and it generally a better bet to seek out a lender that has funded many of these loans. A fixer upper loan requires money for the purchase of the property plus money to finish the rehab work. The part of the loan that goes toward rehab is held by the bank until some or all of the work is complete. Financing your fixer upperOnce you find your fixer upper you can pay cash or you can finance your house one of several ways. 1. Consider owner financingThe seller may be willing to hold the mortgage. Such financing is the fastest, cheapest, and easiest way to buy the fixer upper. However, however with this type of loan you will have to get a second mortgage for the rehab work. 2. Apply for a standard purchase mortgage loanThe lender will limit the loan amount of the mortgage loan to about 80% percent of the value of the property. You will have to come up with the money for improvements yourself. 3. Get a construction loan.Construction Loan Application. A construction loan lender will appraise the value of the house with the improvements made. The lender will disburse funds for closing based on the purchase price and hold back the funds for you to use for improvements. The lender will put that money in a construction loan fund and disburse it as the improvements are made. This type of loan allows you to incorporate both the purchase price and cost of rehab in one mortgage. Mortgage interest rates are the lowest category of loan interest rates. Be RealisticMany people are enticed by the prospect of making money by repeatedly buying rundown homes, moving into them, fixing them up and reselling them for a profit. The strategy has become even more popular in recent years, thanks to homeowner-friendly changes in the capital gains portion of the federal income tax code. Given all the right circumstances, fixer-uppers can be a lucrative investment, but they're by no means a sure bet or a license to print money. Do you have the knowledge required?
What improvements are likely to add the most value?As a general rule improvements that merely bring the home in line with expected minimum standards don't add much resale value. For example, new carpeting or painting dirty walls. If you spend money making the wrong improvements, you won't see much return on your investment. And make sure your cost estimates are accurate. Verify each with your likely product vendor and have your contractor give you a fixed estimate, not a cost plus estimate. All houses in the neighborhood are in a range of values. Make sure that the improvements you make to your fixer upper don't take the sales price over the high end of the range, known as over improving. Are market conditions in your favor?Some markets are continuing to decline so you have to make sure you buy at the right price. If home values are depreciating in your market, your fixer-upper might be worth less than you paid for it even if you make wise improvements. The cost of carrying the mortgage for a few extra months will also eat into any profit or might even cause you to lose money. Gypsy LifeAre you prepared to pack all your belongings, put your home on the market and move every few years? Moving is time-consuming and stressful, even when it's anticipated and welcome. Will your spouse cooperate with repeated packing and unpacking? How will your children cope with switching to a new school every few years? Will you be able to bond with your neighbors? How much will it cost to move your furniture and household goods? Cost of SaleWill transaction expenses such as Realtor fees, title policies, and other seller costs wipe out your profit? Even the considerable advantages of home ownership, it isn't always worth the transaction costs associated with buying a home for a short-term residency. Your fixer-upper resale will have similar costs. That can certainly eat into any anticipated profit. Will the higher resale value of the home exceed your purchase price, plus your investment, and your transaction costs? If so, will the profit be adequate compensation for your time and effort? Due to risks, capital invested, and time involved, a flip investor should be looking to realize at least 20% profit within a twelve month period. |
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