“While people make the choice to own or rent that suits them at a given point, maybe more young adults should take into account the long – term consequences of renting when homeowner- ship is an option”. Urban Institute
TOP STORY: Restoring Old Homes
There are a lot of reasons for buying a fixer-upper. Older homes can have a charm missing from some mass marketed housing developments of recent years. They can be a bargain, an opportunity for creating a unique home, a way to turn a quick profit. In rare instances they present a chance to restore and live in a piece of history.
There are also many reasons to avoid the temptation. Have you seen The Money Pit? There are several questions to be asked and decisions to be made before you launch into your Tom Hanks or Shelley Long impression.
The End Game
The first decision is what your fixer- upper will be when it grows up. Your home or an investment property? A loving restoration or a quick flip? Those decisions will form the framework for whatever happens next. For example, some incentives for restoring old and/or historic properties are not available where the finished product will not be owner occupied. There are implicit time limits for getting into and out of a flip because time truly is money. Fixing up a property that will be a comfortable and efficient home is very different than the research and planning necessary to return a home to period accuracy.
Then there are decisions about what you are willing or able to tackle. Are you looking for a house that is simply in need of cosmetic improvements or are you up for a gut rehab? Are you constitutionally suited to living amidst construction mayhem? Do you have the funds not only to buy the property but to complete the work? And, if necessary, to do so while maintaining a second place to live? Is your skill set conducive to doing some or all the work or will it require professional assistance from start to finish? Are you willing to buy in an area just starting a comeback or only after the pioneering is done?
Picking a Period
What generation of housing calls out to you? Each era has its own problems. Really old homes, especially those of an iconic style such as Victorian or Craftsman don’t even exist in some communities and when they do are often on busy streets or have small lots where having a garage, pool, or patio is not only physically impossible but historically inaccurate. These homes are in short supply as well; other fans will likely have beaten you to the punch.
The homes after World War II were often mass produced, thrown up in a hurry to meet the housing shortage as millions of the military returned home, formed households, and started families. They were often small and cramped and many contained only two bedrooms and perhaps only one bath.
Every period has had its housing “fad,” and there remain large numbers of older homes with convoluted floor plans, unique exteriors (unique being the kindest word we could find), or special features which did not prove durable either in a physical or a cultural sense. It can be difficult to bring these homes into the current century in terms of efficiency, livability, or appearance.
Shopping the Bargain Rack
Not many of us will have the opportunity to buy an historic or architecturally significant home (but if you do – stay tuned for some suggestions as to how you might finance the restoration.) Instead, you will find most fixer-uppers available for sale are either just plain old, or younger and neglected.
The amount of work often depends on the age of the home – newer homes might need to recover from a lack of maintenance or merely bad taste. Old homes could need complete updating of systems – plumbing, HVAC, or electric. Regardless of age, there may be a pressing need to undo “improvements” rendered by prior owners.
Older homes can present another concern; many materials used in construction, and sometimes not all that long ago, have been found to be noxious or downright dangerous. Aluminum wiring, lead paint, asbestos, off – gassing materials, especially those containing formaldehyde should all be on the inspection checklist. Lead paint, though not in wide use inside of homes after the mid-1950s, is still a concern for those constructed prior to 1978 when it was totally banned.
Shopping with an eye to flipping is very different from shopping for a home. Every decision should be guided with an eye to resale and even a sharper eye on purchase and rehab costs which might indicate the wisdom of looking for an ugly duckling rather than a true rehab. Keep an eye out for properties that have been on the market for a while, ideally with serial price reductions, and inspect each with an eye to determining why it hasn’t sold. Not every buyer can see beyond scarred countertops, soiled carpets, a horrible color scheme, or an overgrown and junk-filled yard. If you can, then a house like this might be a quick way to make some money.
Bottom Line, Top Concern
A lot of the bank-owned houses late in the housing crisis were on their return trip. Buyers, usually those planning a flip, can have plans bigger than their pocketbooks, run out of money or time (which, we repeat, can be the same thing) and end up losing their semi-rehabbed “bargains.” Before going in, a purchaser must know what it will take to get out.
BETTER BUY SOONER
That seems to be the lesson of a recent Urban Institute study on the effects of early homeownership on household wealth. Individuals who bought their first homes between the ages of 25 and 34 accumulated a median of $150,000 in housing wealth by their early 60s. Those who didn’t buy until they were between 35 to 44 accumulated $72,000 less. Those who waited until their 45th birthday or later racked up at least $100,000 less than those in the 25 to 34 age group. Those who bought before age 25 scored slightly less well, probably because they had less education than other groups, and that resulted in lower incomes over the years. Urban Institute
Love isn’t nearly as blind as the prospect of getting a steal. No matter how much you love the property or how handy you are with a hammer or a paint brush, regardless of how hot the bidding wars, the one contingency never to drop from an offer on a fixer upper is the one allowing inspections. Notice the plural noun. Go with the routine housing inspection if you wish, but even if the house survives that one, bring in a general contractor to assess the structural integrity of the house and provide an estimate of rehab costs. Do this, even if it involves paying a consulting fee. Nothing takes the thrill out of homeownership like realizing you have underestimated your rehab budget by tens of thousands of dollars.
If the house is old enough to warrant it, you should get a lead paint inspection. If nothing else, it will avoid problems at resale. Consider also mold and pest inspections. Weather is increasingly making the former wise and it doesn’t take decades, sometimes not even months, Tor insects to work their magic.
Carbon sequestration, the process used by trees and other greenery to pull CO2 out of the air, is the inspiration for a bio char-based, carbon-negative building material called “Made of Air.” The material, developed by Elegant Embellishments, a Berlin-based think tank, is composed of 90 percent atmospheric carbon dioxide. Biomass, an organic waste which absorbs and stores carbon dioxide, is mixed with a binder and molded into construction materials such as facade panels. At the end of its life span, Made of Air can be shredded, and then sequestered in the soil. Architect magazine
Paying the Piper…and Plumber
Paying for all of this may require a strategy as well as money. If the house is to be your home, and it is – or can be quickly made – habitable, the work could be done over time and as funds become available. Using high cost, short term money such as credit cards or borrowing from a 401 (k) is risky unless more reasonable take-out funding such as a home equity loan (HELOC) or a refinance will be available at project end. Arm yourself with comps from a real estate professional or get advice from an appraiser to make sure the finished project will support the needed value. Borrowing from family or friends can be risky too, but not necessarily in a monetary way.
There are loan programs that can be used for an investment property, but owner-occupancy opens more doors. Fannie Mae’s HomeStyle Renovation loan is available for both; providing funds for both purchase (or refi) and improvements. The company says just about any type of renovation or repair is eligible, even luxury improvements like an in ground pool, so long as the improvement is permanently attached and adds value. Another possibility is the Department of Housing and Urban Development’s (HUD’s) Title 1 insurance program which can be used for any improvements that will make a property more useful – residential or non.
Other sources for financing investments or flips might be portfolio or construction loans from a local bank or cashing out equity from a personal residence with a refinance or HELOC, bearing in mind that this puts that property on the line. Taking in a partner or two will add to your borrowing power and will also spread the risk.
Life is easier for a potential owner-occupant. In addition to the resources named above, the VA and USDA will both lend more than the appraised value of a home to enable home improvements, although the caps for the rehab amount are relatively low. The best bet may be one of the two varieties of FHA 203(k) loans. The Limited version is intended for small projects, cosmetic improvements, or energy retrofits. The renovation part of the loan is capped at $35,000, but the work can be done by the homeowner or contracted out.
The second version is designed for more extensive repairs, even restoring a house from the foundation up, with the loan amount pegged to the assumed value after the rehab. However, work must be done professionally, and funds disbursed as milestones are achieved.
If you should be fortunate enough to find one of those historic properties, there could be federal and/or state funds to help. Two federal programs will pay either 10% or 20%, but only toward the restoration and only for investment properties. Costs are paid through Historic Preservation tax credits after the work is completed. Qualifying is both tough and expensive. Homes must be a minimum of 50 years old, have a link to an historic event and be rehabilitated for commercial, industrial, agricultural, or rental residential purposes. There are also a lot of fees involved.
Many states have programs to incentivize the preservation of owner-occupied historic homes. Most of these are in the form of tax credits as well. While that is no help with upfront costs, it could help to retire some of the construction debt.
Among these is California’s Mills Act tax abatement program. This is a local option program which allows participating localities to reduce property taxes on historic properties in exchange for their preservation and rehabilitation. Properties must be deemed historic by the local, state, or national government and have some type of significance such as being where a well – known event occurred, a notable person lived, or an example of an important architectural style.
The state law has been around since 1972, but not all local governments have adopted it. Where it is available, the rules and procedures vary. However, participants can realize property tax savings of between 40% and 60% each year.
NO PLACE LIKE HOME
“Whatever happened to American wanderlust? Manifest destiny? Hitting the road?
The fact is, Americans are less likely to pack up their belongings and relocate now than at any point in recorded history: Only about 11% moved to new homes last year, the lowest rate recorded since the government started keeping track 70 years ago. This includes a drop in the number of folks moving to new homes in the same state, as well as those moving across state lines.” Lance Lambert, reoltor.com.
Not everyone is cut out for the kind of adventure that fixing up a fixer upper can become. Still it is an option that could make homeownership more affordable. Before you take the leap, talk to a loan officer about your options for a mortgage; and contact your favorite real estate professional as well. Then drop in on Netflix. There is a movie that you might want to watch before you begin.