Buying a Diamond in the Rough

It may be your budget, or the thrill of doing it all yourself, but you’re in the market for a diamond in the rough. But just how rough can a house be before a lender decides not to take the risk on a mortgage?

When you negotiate the contract, make sure that you include a provision for a home inspection for structural integrity, defects and potential problems. This isn’t part of the appraisal, it is a separate detail. A home inspection ascertains the health of the house you are buying. Whether it be a bad roof, leaky plumbing or termite damage, a professional inspector will find all of the major problems. As part of your report, you will receive a list of what needs to be repaired or replaced, the time frame and the potential costs. If you are buying a fixer-upper, you may find that your lender will require an inspection. Some will and some won’t, but you should insist on one to protect your best interests. It’s called doing your due diligence.

What if you luck out and there are no major problems, just minor ones? Maybe the carpet is worn and needs replacing. Perhaps the deck needs a little work. New paint and fresh air could be all it needs.

Minor, cosmetic concerns are usually not strong enough to scare away lenders, but could lead to negotiations between the buyers and sellers. Unless you’ve done this before, you will find a good real estate agent is invaluable to negotiate for you.

If you want certain things repaired by the seller, such as the mailbox fixed and the deck painted, make sure it is in the contract. If it is, and the seller agrees to it they must perform the repair. You may be able to have the appraisal include the repairs spelled out in the contract. This can help you when getting a mortgage, just make sure that it’s all in the contract.

Occasionally, the seller may ask to perform the repairs after closing. Many buyers simply ask for a seller’s concession. Instead of installing  carpet before closing, the seller agrees to reduce the purchase amount it will cost the buyer to put in new carpeting. There are loans that will give you money back at closing to do repairs. You should ask about them when getting the loan. This money will become part of the loan that you have to pay back though.

If you don’t have the money in hand to buy the carpet, don’t expect your lender to give it to you. Even if your contract states that the seller will give you back that amount after closing, don’t expect it to happen. Cash allowances written into contracts can’t happen. The lender will not allow the seller to hand over cash at closing. Your real estate agent should steer you away from this and help construct a sales contract that will please both the buyer and the seller. But don’t expect to come home cash in your pocket. It just won’t happen.

Buying a fixer-upper can be rewarding. You get to choose how you want to improve the home. But it is a lot of work and definitely not for every buyer. Your best bet is to be  completely upfront with your lender about your intentions. This will help the transaction to go smoothly.


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