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Fixer Upper Home

Section 2 - Chapter 8 (continuation)

Remember to always expect the unexpected with houses, and especially fixer upper homes. That is why you figure in another $2,000 in the example above. Things will happen.

Be sure that you can handle the cash requirements for the project. If you can use your credit cards to do the repairs, you can probably refinance the home and pay off the cards when you are done. Just be sure to plan for the refinancing costs too.

Another way to come up with the money for the repairs is to use one of the FHA mortgage programs designed for rehabbing a home (possibly the 403K or 203K). With this type of mortgage loan, you borrow enough for the purchase and the repairs. Ask a loan broker what's available at the moment.

Here's an example of a creative way to buy a fixer upper. The seller has a wreck of a house that you decide to fix on your own. He wants $140,000, and you know that it will be worth $200,000 when you are done. You offer him $144,000, with $4,000 down, monthly interest-only payments with 6% annual interest, and the balance of $140,000 to be paid within one year.

He accepts after you explain that you will be putting a lot of money into fixing the place up, so his home will be decent collateral. He is also getting more than what he is asking, and $8,400 in interest if it takes you the whole year to pay him.

With yard work and smart shopping, you finish the house in less than three months, using your credit cards to finance the repairs. By doing the work yourself, the repairs and the credit card interest total only $14,000. Three interest payments to the seller total $2100. When you get a new loan from the bank, the loan fees and appraisal cost $2,900. Your total costs are about $19,000.

The house appraises at about $200,000, as you thought it would, and the bank loans you 90% of the value, or $180,000. After paying the seller his $140,000 and paying off the $19,000 in costs you ran up on your credit cards, you have $21,000 in cash in your hands. You also have $20,000 in equity in your fixer-upper home. Not bad for a few months work.

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