3 Reasons Why Buying A Fixer Upper Is Harder Than HGTV Makes It Look

3 Reasons Why Buying A Fixer Upper Is Harder Than HGTV Makes It Look

3 Reasons Why Buying A Fixer Upper Is Harder Than HGTV Makes It Look

Everyone has seen the shows at least one time.  Whether it's framed as a house hunting show for fixer uppers or whether it's a flipping show aimed at showing the investment angle, fixer-upper homes are good for Reality TV.  The problem is that most of that "reality" isn't real.  I'm not talking about the staged showings or the faked expressions that these shows are guilty of.  I can live with ridiculousness of it all because it's entertaining.  What gets me is the lack of conversation around the difficulty in structuring these deals and how most home sellers (and would be buyers) don't have the stomach to deal with it.  Not that they have to in this up market.   The biggest farce of these shows is that they don't show how hard the money is to obtain.

Let's start with the assumption.  Borrowed money is usually an advantage to the borrower.  In theory, a home buyer could buy a fixer upper and roll in money for renovating the home.  For less than the cost of a weekly trips to starbucks a buyer presumably could finish out a room. (For example: a $50,000 renovation might add only $250 or so a month to the loan in this scenario). Typically this is a great option. The hard part is that these loans are typically very hard to get and qualify for, but not only that, there are 3 Reasons Why Buying A Fixer Upper Is Harder Than HGTV Makes It Look.

The Home Must Appraise

The appraiser becomes the most powerful person in the real estate transaction and ultimately can decide the fate of the deal.  When appraisers got in trouble in the past, the government stepped in and created new processes for these loans in an effort to reduce fraud.  What was supposed to help keep the appraisers in check has made them the judge, jury and executioner of your home purchase dreams.  Most appraisers are awesome and do a great job, but since they are human, they make mistakes.  Unfortunately, there's no accountability for appraisers who get it wrong.  If you're an experienced real estate agent, you're probably getting ready to comment about the third party intermediaries that are supposed to help with that.  Likewise, if you're an experienced real estate agent then you know that fighting a mistaken appraisal is like trying to rationally argue with a 2 year old. 

The Contractor Has To Be On Board

In this process, the contractor is a big headache as well. Not only do you need a competent contractor but one that understands how these loans work.  Most of these loans have paperwork that the contractors have to fill out in order to get paid or have their bid considered.  In fact, most of these loans will include a bid by the contract.  Bid too low and the deal dies.  Overbid and the deal dies.   Bid on something that the appraiser doesn't value and the deals die.    Not only that but these renovation loans rarely pay contractors the way they want.

The Lender Doesn't Write You A Check

Let's say you make it all the way to the closing.  The contractor will be disapointed to find out that the lender doesn't just cut you or them a check.  They pay in small draws.   For a large general contractor this might not be that big of a deal but chances are really, really good that you won't make it to the closing table if you're using an expensive large general contract.  Your smaller contractors often struggle to budget from deal to deal and the way these fixer upper loans payout they are going to be carrying debt while the renovate your home.  For most contactors that might be too big a pill to swallow. 

My advice to home buyers is to only try this option if they have the time (you don't HAVE to move or you're retired), the stamina (these transactions take longer) and understand the market enough to know there is value in the renovation. It should be easily apparent to everyone that if you invest money into the home it will increase it's value.  This might be easier with Huntington Beach, CA  real estate where prices are higher than say a Clermont FL Home.  



WRITTEN BYJOSHUA JARVIS, POSTED ON FRIDAY, 03 AUGUST 2018 

SOURCE: https://realtytimes.com/agentnews/advicefromagents/item/1018992-3-reasons-why-buying-a-fixer-upper-is-harder-than-hgtv-makes-it-look?rtmpage=jarvisteam


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Dated: August 4th 2018
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