Real-estate ads often contain clues about the size and condition of a home. The acronym TLC, which stands for “tender loving care,” is one such clue. An ad that states the home "needs TLC" warns buyers the home is a fixer-upper and needs repairs. Although the needed work might be too costly to make the home a good buy, acknowledgment that the home needs some TLC is often a sign that the price reflects the home's condition.
Benefits of Buying a Fixer-Upper
A fixer-upper can be an excellent value if the renovations it needs are mostly cosmetic ones that don't require expensive repairs to the home's major systems and structures. Visible improvements such as drywall repair and new flooring generally add more value than do invisible repairs such as plumbing upgrades and foundation repairs, according to the National Association of Realtors. In addition, a fixer-upper gives you the freedom to reflect your taste and make the home truly yours.
Risks of Buying a Fixer-Upper
The primary risk of buying a home that needs TLC is that you'll be stuck with more work and expense than you bargained for. It's also possible to get carried away with your renovations and do such a great job that your upgrades are above the norms for your neighborhood. Overspending reduces the value of your upgrades. Granite counters, for example, have less value in a community where laminate is typical than they have in a community where similar homes also have granite. On the other hand, the danger also exists for sub-par upgrades to detract from the home’s value compared to similar homes that are better-appointed.
Reducing the Risk
Bring a licensed contractor to tour the home before you make an offer. The contractor's immediate reaction may be a good indication of whether the home is worth the effort. Then, request all the inspection contingencies in your offer to purchase and/or sales contract, and hire a licensed home inspector to perform the inspection. The contingencies allow you to cancel the sale if you're unsatisfied with the inspection results and unable to negotiate an acceptable resolution with the seller.
Making an Offer
Often, when an agent advertises a home as needing TLC, it's because the seller has decided to sell the home as-is. "As-is" means the seller won't make repairs. Have your contractor prepare an estimate for renovations. Add 25 percent to the estimate to account for unforeseen circumstances. Subtract that from the realistic sale price for a similar home in good overall condition, as determined by the comparative market analysis your buyer's agent will prepare for you. That's a good baseline for determining how much to offer.
You have several options for financing a home that needs a little TLC -- or a lot. One of the most commonly used is an FHA 203(b) renovation loan that works as part of a Federal Housing Administration loan, allowing you to purchase a home that wouldn't normally qualify for FHA financing because of the condition. You make the repairs after you move in. A consultant helps you assess the home to determine which improvements take priority. Fannie Mae offers a similar program, called HomeStyle. The HomeStyle renovation loan has a higher loan limit than the 203(b) and, although both require that most work be done by a licensed contractor, HomeStyle borrowers aren't required to hire the consultant to prioritize the work. Some private lenders also offer renovation loan products.
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