Title : Fixer-Upper or Money Pit? Signs You Shouldn’t Buy a House
Description : If you want to flip an older home, don’t buy until you determine if it’s a fixer-upper or a money pit. Check out these signs you shouldn’t buy a house.
Content : New Jersey has hundreds of homes for sale, but not all are worth investing in repairs or renovations. If you think it’d be fun and profitable to flip a house, just make sure you have all the information before you put down your money. Is it a fixer-upper or money pit? Signs you shouldn’t buy a house are everywhere, so keep your eyes open and ask a lot of questions. New Jersey’s required disclosure laws state that a seller must inform buyers about:
Buying a fixer-upper can provide a shortcut to homeownership for first-time home buyers, a way for repeat buyers to afford a larger home or a better neighborhood, or an opportunity to explore investment opportunities in renovating and re-selling homes for potential profit.
In New Jersey, where the majority of typical three-bedroom homes ranges between $300,000 and $500,000 and the median value of owner-occupied homes over the 2015-2019 period was $335,600, looking for more affordable homes which need repairs or updates may also offer possible cost-savings for those on tight budgets. New Jersey also has a large supply of older homes which may need fixes of some type; the most active home building period in the state was in the post World War II period of suburban growth between 1950 and 1970 when a million homes were built over the 20-year period, and many of these homes now have aged to the point that they need some level of improvement. The profit potential for real estate investment in New Jersey is also a key attraction for buyers, with one study reporting that in the nearly ten years from 2010 into 2020 home values nearly doubled in value. So buying fixer-uppers remains popular: according to a survey from Realtor.com, in 2019 nearly 60% of home shoppers throughout the nation said they were open to a house that needs renovations.
But buying a fixer-upper also poses substantial risks. A fixer-upper is a house that’s cheap because it needs work. The sellers list it below market value because it’s going to cost the buyers to fix it. But before starting bargain hunting, buyers of fixer-uppers need to know that renovations aren’t as easy as they may look on TV. Seemingly simple projects can become complicated once the fix-up starts, and if costs end up higher than estimated, finishing your to-do list can take longer and cost much more than anticipated.
Real estate professionals cite some of the most common mistakes as assuming that you can do too much of the work yourself without professional help; under-estimating the time and money needed to complete the job; misjudging the market for re-selling the home; and spending on improvements which may have only marginal impact in increasing a home’s value rather than focusing on updating kitchens and bathrooms, the features which are viewed as most critical in adding value.
Like much of the global economy, the New Jersey real estate industry also has been disrupted by the COVID-19 Pandemic. In the early months of 2020, the supply of available homes dropped sharply as sellers were reluctant to have potential buyers, brokers and other agents visit their homes with the risk of spreading the virus. Toward the end of the year, the inventory of homes listed for sale gradually recovered as knowledge of the virus increased and protective measures were more broadly implemented. In 2021, the market also may be impacted as sellers whose income and assets were adversely affected by Pandemic-related job losses and business lockdowns are forced to put their properties up for sale--with many of these listings saddled by debt from missed mortgage or rent payments.
"Location, location, location" is the time-worn mantra of the real estate industry, and buyers must be aware that it is the single most important characteristic of a home in its impact on resale value (and the value in general) more than any other house feature. Those buyers interested in fixer-uppers can easily research nearby comparable sales before touring a home by looking at data easily accessible over such popular web sites like Zillow.com, Realtor.com and those from regional multiple listing sites and local brokers. These “comps,” or comparable sales, refer to listed homes and recently sold properties that have similar characteristics. square footage, features and location.
Apart from the price of recent listings and sales, buyers should also look at how long it took for homes to sell after first being listed and whether the average time is consistent with the buyer's own schedule and budget. If the property is intended for a quick re-sale, the cost of holding it in taxes,insurance, utilities, maintenance and other fees may erode any profit assumptions made at the time of buying the home. In 2020, the average time to sell a home in New Jersey--from listing through closing--was approximately 99 days. That’s 64 days to get an offer, plus the typical 35-day closing period. But for fixer-uppers intended for re-sale, the time can stretch into many months given the delays inherent in obtaining building and occupancy permits and completing repairs and renovations. Buyers looking at homes in foreclosure or owned by banks after defaults also need to be aware that New Jersey, which requires that foreclosed homes go through sometimes lengthy judicial proceedings, has historically ranked as one of the states with the longest time required to complete the foreclosure process.
Beyond attractivenesss of the location of a municipality or neighborhood, buyers need to consider that many, if not most, fixer-upper projects encounter unexpected delays and costs. Despite the added initial expense, hiring more than one contractor and home inspector to provide estimates on repairs and renovations may be safer than relying on a single opinion alone.
Can I Get a Home Loan for A Fixer Upper?
A key initial consideration when deciding on buying a fixer upper is financing the purchase and needed work on the home. Most traditional loans won’t allow including the renovation costs in the mortgage, and many lenders are understandably reluctant--particularly with first-time fixer-uppers--to extend credit given the risks of inexperience of those seeking financing and uncertainty that the project will be completed on schedule and within the proposed budget. Even projects which do not encounter construction delays may face new hurdles when offered for re-sale. Despite the smaller market of lenders, there are some specialty loan products specifically designed for fixer-uppers which allow financing a house purchase and improvements at the same time--albeit often with additional fees and conditions involved. Most of these loans rely on some type of government backing, and include agencies such as the Federal Housing Administration (FHA 203(k) loans allowing lower income and credit scores than conventional mortgages); Department of Veterans Affairs (VA renovation loans requiring VA-approved contractors); Fannie Mae (HomeStyle mortgages requiring higher credit scores than FHA 203(k) loans but allowing financing of broader scope of improvements like landscaping; and Freddie Mac (CHOICERenovation loans allowing improvements to help withstand natural disasters).In addition to these programs, the state of New Jersey and some municipalities also offer a variety of financing and tax incentives to support rehabilitation of residential properties, typically targeted to areas and neighborhoods designated as economically distressed.
In dealing with lenders, buyers also must be careful not to take steps that may raise a red flag, particularly in the final stages before a closing. One common mistake, for example, is using credit cards to finance purchases like furniture, appliances or other expensive items in anticipation of moving into the new home, which may be understandable but which nonetheless may adversely impact a buyer's credit rating just before the closing.
Site issues: Foundations, drainage, slope of lot, downspouts and underground storage tanks and septic system
Despite New Jersey laws mandating that sellers disclose known defects in a home's construction or other issues relating to it's habitability.other critical problems may be outside the scope of what legally needs to be disclosed and not be identified in home inspections prior to closing. Some of the costliest issues relate to the location and configuration of the lot.
Although flood maps published by the Federal Emergency Management Agency show designated flood zones, lots located outside the zone may nonetheless be subject to drainage issues during heavy rains, particularly if the lot's configuration directs groundwater back toward the home's foundation and basement, a situation which may be exacerbated if downspouts from the roof aren't positioned to discharge water to an adequate distance away from the structure. To avoid surprises from unexpected flooding, potential buyers are advised to try to visit the property either themselves or through their broker or other agent during or just after a heavy rain.
Another hidden site issue may be the presence of underground tanks, typically those for fuel oil or septic systems. These tanks may have been buried when the home was first constructed, but later forgotten after they were taken out of use, such as after the home converted its heat to natural gas or connected to a sewage line.Typical signs of an in ground oil tank include vent and/or filler pipes, disconnected oil lines coming through the foundation wall which were the supply and return lines from the heating oil tank, or a concrete channel visible in the basement floor that leads to the furnace area. Over the years, these tanks may have rusted and corroded in place with, in the case of fuel tanks, possibly leaking to pollute ground water. Discovery of these problems after closing of the sale can lead to thousands of dollars in unanticipated costs in removing the tanks and alleviating any pollution, as well as legal fees in efforts to establish liability. New Jersey regulatory bodies dealing with issues relating to residential unregulated heating oil tanks are the state Department of Environmental Protection where there is some evidence of a leak from a tank and the state Department of Community Affairs, which regulates the removal and abandonment of the tanks. In addition to checking government records, potential buyers may be wise to talk to neighbors, fuel oil companies, building inspectors, fire departments and others who may have some knowledge of the history of what may have been buried on the site.
Removal of underground storage tank. Photo: CurrenEnvironmental.com
Also known as a stipple ceiling, stucco ceiling or acoustic ceiling, a popcorn ceiling is a ceiling with one of a variety of spray-on or paint-on treatments. In many parts of the world, it was the standard for bedroom and residential hallway ceilings for its bright, white appearance, ability to hide imperfections, and acoustical characteristics.
Popcorn Ceiling: Photo by Roskvape at Flickr via Wikipedia CC BY SA 2.0
In the ’40s, they were considered charming. Today, they are a major red flag that may make a buyer pass on purchasing a house. Popcorn ceilings,which often contained white asbestos fibers, indicate that their construction took place before the dangers of asbestos in construction materials were understood. They can release toxic dust and make homeowners extremely sick. For the prospective buyer of a fixer-upper, the presence of popcorn ceilings may suggest steering clear of the home or at least recognizing the full extent of the time and money needed to replace them.
When asbestos was banned in ceiling treatments in the US by the federal Clean Air Act, popcorn ceilings fell out of favor, but existing inventories of asbestos-bearing texturing materials were exempted from the ban to minimize economic hardship to suppliers and installers, thus making it possible to find asbestos in popcorn ceilings that were applied through the 1980s. The health concerns over asbestos-infused ceilings also were complemented by a design trend toward more modern, clean-lined design preferring smooth ceilings, whose advantages include providing more reflective bouncing natural light throughout the room space; not harboring dust and allergens (only to be re-introduced into the air), and allowing easier patching and touching up after a drywall repair, etc.
What lies below? Multiple Paint Coats
Buyers looking at a structure predating 1978 may find that there is lead paint under subsequent coats over the decades. Lead-based paint was banned from residential use in New Jersey in 1971; however, it was not banned nationally until 1978, so any pre-1978 housing may contain lead- based paint. In 2017, after studies disclosing high lead levels in the blood of children in some municipalities, New Jersey enacted legislation tightening allowable lead paint levels, requiring local health boards to determine lead contamination in a home occupied by a child whose blood tests were above a standard recommended by the federal Centers for Disease Control and Prevention. Sellers and landlords are required by federal law to disclose known information about lead paint before sales and leases go into effect, with buyers having ten days to check for lead paint in their new homes, according to EPA regulations. Lead paint removal requires professionals who are thoroughly trained and protected with breathing devices and uniforms.
Apart from lead paint, another risk with buying and selling older homes is the possible use of calcimine paint. This type of paint, made from additives which could include egg shells and glass, was frequently used on plaster walls in homes built during the post-World War II housing boom in the 1940s and 1950s since, unlike oil-based paint, it could be applied without waiting for the weeks in which plaster needed to cure. Subsequently, however, it was found that latex and other modern paint applied over the calcimine would fail to adhere, often resulting in blistering, bubbles and peeling. Most professionals advise that the only effective solution to dealing with calcimine coatings is to scrape off all the top layers of paint and scrub away as much of the underlying calcimine as possible--a time-consuming and potentially expensive process.
A Strange Smell
Don’t just assume that a distinct odor is an inherent part of owning an older home. You’ll learn to detect something out of the ordinary as you tour more properties, but don’t be afraid to investigate anything. It could just be musty age, or it could be a symptom of an expensive problem like mold or rats.
Mold and mildew are two dissimilar types of fungi--a family that includes mushrooms, yeast and other characters, Despite their differences, mold and mildew are commonly considered by most people to be the same. Mold casts are black and green, mildew is gray and ashen. In the same manner, molds grow on food and mildew on soggy surfaces.
Molds are neither plants nor animals. They're microscopic organisms containing enzymes (responsible for digesting and decomposing) and spores (in charge of reproduction). It's a type of fungus that grows from tiny spores that float in the air. It can grow almost anywhere that spores land and find moisture and a comfortable temperature, between 40 and 100 degrees F. Typically that includes about every damp place in a home.
You can easily spot the most visible type of mold, called mildew, which begins as tiny, usually black spots but often grows into larger colonies. It's one of the easier ways of how to tell if there is mold. It's the black stuff in the grout lines in showers, on damp walls, and outdoors on the surfaces of deck boards and painted siding, especially in damp and shady areas. A mildewed surface is often difficult to distinguish from a dirty one. To test for mold and mildew and how to tell if a house has mold, simply dab a few drops of household bleach on the blackened area. If it lightens after one to two minutes, there is mildew. If the area remains dark, it is probably just dirt.
Most mold is unmistakable, but sometimes small or largely hidden growths just make a surface look dirty. A quick test for mold can be done by dipping a swab in diluted bleach (1 part bleach, 16 parts water) and dabbing it on the wall. If the spot quickly lightens (or keeps coming back after cleaning), assume it's mold. Mold test kits are widely available that detect the presence and identify the type of mold, but they won't help determine the cause or what to do about it.
Mold (left) compared to mildew (right). Photos: Moldtips.com
Knob and tube wiring. Photo by Laura Scudder via Wikipedia CC BY SA 2.0
The house inspection may suggest replacing the electrical system, but unless it’s actually faulty or at risk of starting a fire, the home may still get a pass. That doesn’t mean that the buyer won’t end up spending thousands on the wiring sooner or later. If the system is knob and tube or aluminum, flipping the home may be more complicated than anticipated. Old electrical cable can remain functional for a long time as long as it hasn't been damaged and the insulation hasn't become so brittle that it flakes off.
Even knob-and-tube wiring (named for the ceramic insulators that routed wire through wall studs and cavities) is still keeping many old houses up and running. But age catches up with wire. The cloth-covered wire in an older house probably dates from the first half of the 20th century. If the insulation fails-- because it has become abraded, or chewed by a winter guest in the walls--a short, an electrical arc and a fire could result.
There are several kinds of electrical cable with a spiral metal jacket. One is metal clad cable which is still used, especially in areas where the cable is exposed to potential damage. Another is armor clad, or AC, which does not have a separate ground wire inside the metal sleeve. It uses the sleeve itself as the ground and for that reason is often barred in new construction.
The right time to replace old wiring like this is when there are obvious signs of a problem, such as scorch marks on terminals in switches and outlets, missing or damaged insulation and any other condition that might expose you or your house to a live wire.
One benefit to replacing outdated cables and receptacles is that you can add grounding wires and three-prong receptacles. Grounded circuits are not only safer but also more convenient. Other upgrades include adding ground-fault circuit interrupters and arc-fault circuit interrupters, both now required by building codes in new construction. These devices sense problems and shut off the power before a fire or other problem occurs. New circuit breaker panels with sufficient capacity--200 amps is the standard in new construction these days--are also installed to replace old-fashioned fuse boxes in many fixer-uppers.
Photo+ Rosk Vape via Flickr/Wikipedia Commons CC BY 2.0