It’s fairly common for REALTORS® to receive calls from buyers looking
for REO (real estate owned) or fixer-upper properties. REO are
foreclosed properties now owned by a lender. Most fall into the
fixer-upper category. Buyers generally feel that accepting a fixer-upper
might provide a much-needed price break while others are looking for
something they can improve and resell for a quick profit. Keep in mind
that trying to buy a “fixer” using OPM (Other People’s Money) is not a
simple process. Fact is, buying such a property with little or no money
down is virtually impossible. Just like an auto lender who wants to be
sure a car runs before they loan on it, home lenders want to be sure a
house can, house. Buying a fixer involves much more than just the
willingness to do repairs. Remember, the two components of a loan are
buyer strength and collateral (the property). Loans with little or no
money down are highly scrutinized by underwriters who much cautiously
assess the lender’s exposure. Lenders don’t want to be stuck with a
property that will bring far less than owed at a foreclosure sale. This
is exactly what happens to homes needing major repairs. With a healthy
down payment some lenders will accept these properties if repairs are
made by a licensed contractor.
A construction loan may be
required if extensive repairs are required. An FHA Section 235 loan
(3.5% down) allows buyers with verifiable experience to make repairs
themselves. It’s not an easy process and one requiring a very patient
seller. It is also possible to have some repairs done prior to
recordation. Because lending rules change almost daily, be sure to ask
your lender how to structure both your purchase contract and contractor
payments. It may be possible to find a contractor who will agree to be
paid out of the seller’s proceeds if the lender allows it. Most don’t
these days. An appraiser is normally required to verify completion of
any repairs that must be done prior to closing. Those short on patience
and weak in the pocket are well advised to consider other options.
Remember, get started any way you can. Adjust expectations of location,
house or land size, but not necessarily property condition. Today’s
buyers no longer consider their home a forever commitment. Start small
and work your way up. Until then, remember to “Keep the Faith”!
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