Does this sound like you?

You dream of home ownership or real estate investing however the sales prices of homes in great condition are beyond your current budget?
You look at lists of foreclosed homes or fixer-uppers and think “Gosh, I could buy that home!”
You spot a home that appears to be for sale significantly below other homes and obsess about buying it.
You dream of using “sweat equity” to rehab a home however you do not have a lot of cash to purchase or invest in a home.
You visit websites with names like unbelievablycheaphomesforsale.com (ok, I don’t this one isn’t real) and wonder how to buy one yourself.

Glad you are here! I hear things like this from many clients, particularly those just starting their home buying journey. Buying a home where you can improve the condition is a great way to build equity in the home!

The purpose of this article is to help educate you on the types of “cheap homes” and whether it is realistic for you to buy one. First off…

“If something seems too good to be true, it probably is.”

When you see a website advertising a super inexpensive home, the website is either seeking something from you (hints: clickbait, your personal info, or your money) or there is seriously something wrong with that property. If you are using online resources to find less expensive homes, please ask your real estate agent to sign you up for MLS access or use a well-known, reputable website or app (ie., raveis.com, realtor.com, Zillow) to make sure the listing is real.

First, let’s review the types of properties that are usually associated with being “cheap” and how these are defined in the real estate or financial industry.

Properties in Financial Trouble

Foreclosure - “the legal process by which a lender seizes and sells a home or property after a borrower is unable to fulfill their repayment obligation.” Investopedia .
- A property can be Foreclosed - lender has repossessed or taken the property from the previous owners.
- Or “in Foreclosure” - the lender is in the process of working with the property owners (borrowers) and is following the legal process to take the property in lieu of bring mortgage current. The Foreclosure process in Massachusetts can easily take more than a year before the lender takes the property (even without the federal protection programs such as Forbearance added during the COVID-19 pandemic).
“Pre-foreclosure” - is the “first phase of a legal proceeding that ultimately can conclude in a property being repossessed from a defaulted borrower. In pre-foreclosure, the lender files a notice of default on the property because the borrowing owner exceeds the contractual terms for delinquent payments,” - Investopedia.
- NOTE: These properties are NOT FOR SALE - and in many cases may never be for sale or foreclosed upon as a result of the “pre-foreclosure” label. “Pre-foreclosure” is super misleading when it appears on real estate websites such as Zillow.
- Yes, most likely at some point the owner may have fallen behind on a mortgage and the lender was required to file with the Registry of Deeds a statement that says Foreclosure proceedings are possible.
Short Sale - is an attempt for the owner with lender approval to sell a home for less than the amount due on the mortgage. For whatever reason the home is valued at less than what is owed (market conditions, property condition, lender fees). Contrary to the term, a “short sale” is often a long, bureaucratic process (it can take years!) that requires approval from the mortgage holder and a short sale attempt may never close. Also a lender can concurrently foreclose on the property cancelling the short sale attempt. The rising home sale prices in 2021 means there are very Short Sales listed.
Bank owned (or REO for Real Estate Owned) - The lender or a 3rd party representative now holds the Real Estate Title of the property after the completion of a Foreclosure, failed real estate auction, or a myriad of other reasons.
Real Estate Auction - There are a lot of reasons a property is attempted to be sold at action. The most common reasons in 2021 is where the property is in foreclosure or tax default. The lender, lien holder or their representative attempts to auction the property to settle the debt. A property to be sold at live auction generally does not allow buyer access to see inside the property ahead of time. Some online auctions allow traditional real estate showings in advance. In most cases the winning bidder is buying the home as-is and is required to outlay significant cash on winning the bid, must close quickly, and the buyer may include additional fees that cannot be financed.

Probate or Estate Sale

Homes that are described as “Probate,” “In-probate” or an Estate Sale are no different from any other real estate for sale except there may be additional parties or steps involved prior to a home sale closing. Approval may be required by Commonwealth of Massachusetts Probate Court to grant a license to sell which can result in the real estate closing taking longer.

A Probate or Estate Sale should not really fall into the “cheap home” category beyond buyers thinking there might be a deal here. Yes, sometimes heirs want to sell a property quickly but sometimes heirs can be looking for far more money from the home sale than is realistic.

So why talk about the Financial Situation of the owner? After all you just want to buy a less expensive home, right?

If a property is in financial distress or probate, there is no reason to expect the home to be less expensive to purchase than any other property in similar condition when it is listed for sale. And in some cases, such as a Real Estate Auction, a buyer can incur more expenses such as auction fees, brokerage fees, “technology fees” whatever those are, or expenses usually paid by the seller.

Which brings us to the condition of the property itself….

Homes in Poor Physical Condition

Homes for sale that need work may include phrases like "needs TLC,” “likely a tear down,” or “cash only buyers” in the real estate listing descriptions. For whatever reason the home is in rougher shape than other homes in its market. Sometimes this can be

deferred maintenance (kitchen sink drain is leaking, exterior paint is peeling, everything is very dated),
critical home repairs that have not been made (roof is active leaking, pipes burst when home was unheated),
safety issues (electrical system is uninsurable, deck railing is missing, septic system is failing), or
unaddressed damage caused by the elements or people.

Often when owners are in financial distress, the home also has deteriorating conditions. After all if the owner regrettably cannot make their mortgage payments they likely cannot afford to keep up their home. This may be why potential home buyers associate financial distress with a home being less expensive to purchase.

As a home buyer the property condition and ability to purchase the property should be all that matters. Trying to find a home where the sales price is lower usually means the home’s condition needs work. Rather than calling these “cheap homes” it is more accurate to think of these all as “Distressed Properties.” A home is distressed because the property is not being maintained or is distressed due to the financial situation of the owners or legal status.

Financing a Cheap Home

Let’s talk about what you need to know before shopping for a less expensive or distressed property. Buying a “cheap home” is easy if you have a lot of cash. However most of us do not have a lot of cash lying around.

Most people finance their home purchase using a traditional mortgage where the buyer has a downpayment and then borrows the balance of the purchase price with a mortgage. As part of the financing approval, the lender is required to make sure the mortgage is a good financial investment on their part - the lender not only does a thorough check on the financial soundness of the borrower to determine if they can repay the loan, the lender also needs to confirm the property is valued to the market and is in the minimum condition required of the loan. The loan requirements for the property (and borrower) are set by the government entity underwriting the loan (FHA, VA, Fannie Mae, Freddie Mac), Federal, state and local government regulations, and also the lending institution policies.

Understanding your financing options

Can you purchase a home for what seems less than market value and finance your purchase with a traditional mortgage? Maybe.

Financing any home purchase depends on the type of mortgage you will use, the condition of the property, expenses asked of you to purchase the property and sometimes timing of the seller or lender situation. In general the more money you put down, the easier it is to finance a distressed property. But you also have to remember the funds you will need to improve or renovate the home!

Talk to your mortgage broker before deciding to purchase a distressed property.

It is your mortgage broker’s job to find the best loan program for you - and unless you let the lender know you might be interested in a “fixer-upper,” the lender may recommend a financing program that has great terms however may not work to purchase a distressed property due to property condition restrictions.

What about a Rehab Loan?

Again, maybe. Your lender will need to review your financial situation and the target property to determine if a Rehab Loan will work.

A Rehab Loan should be thought of as 2 mortgages: 1. to purchase the property and 2. finance the improvements. As a result your borrowing power is different when purchasing a property with a rehab loan - the financing has to take into account not only the property purchase price but also the estimated cost of the improvements..

If you do not have a property identified yet, ask your lender to prepare a second preapproval for you based on a few assumptions so you know your purchase budget for that distressed property. Also keep in mind there can be restrictions on the target property. Believe it or not, if the property condition is too deteriorated, it may not be a candidate for a Rehab Loan at all!

Rehab Loans usually require all work to be completed by licensed and insured contractors (builders, electricians, plumbers) which means you cannot use these funds and do the work yourself or with your friends and family.

There are some great targeted uses for Rehab loans. For example a home with a failing septic system is a great candidate for a rehab loan where you purchase the home and then the septic system replaced after purchase.

So, how do you buy a “cheap home?”

Get your financing plan in order! Please start there!
Make a list of what you’d consider taking on for improvements after purchase. Really think about what you do and do not have a tolerance for. For example would you purchase a home:
1. that didn’t have working heat or running water?
2. with avocado colored bathroom fixtures?
3. peeling paint?
4. withvisible mold from interior water damage?
5. damaged walls?
6. dated but functioning kitchen?
7. where you cannot live in immediately after closing?
Work with a qualified Buyer’s Agent who you trust and who really understands what you are looking to purchase.
Patience! You might need to look at a LOT of properties and make offers on many homes before finding the fixer-upper for you!
Sense of humor - when homes are in a distressed condition, you never know what you might see at the property.

Ready to learn more?

Get in touch! I’m happy to schedule a call or meet for a coffee to chat about the pros and cons of buying a distressed property! There is no better way to build equity in a home than making the improvements yourself!

Buying a Cheap Home