We've heard how you can snag a deal by going with a fixer-upper, but is that really true? Today we’re digging in on the dos and don’ts with house hunting!
Finding and Buying a Fixer-Upper, Not a Money Pit
Buying a house – – it’s probably the biggest purchase you’ll make.
And depending on where you live, it can be a crazy market. I know here in Raleigh everyone is saying it’s a seller’s market. And I believe it. I’ve seen houses get listed and that sold sticker put on the sign in less than a week.
Which is great if you’re a homeowner – property values are going up.
But not so much when you’re trying to buy a house, which is what my mom wants to do.
She’s recently accepted a job here in Raleigh and after she’s sold her current home, she’s looking to buy.
She's asked me to tag along and help. And I‘m happy to.
It’s just this means we’re going to have to really hunt for a deal.
A fixer-upper would work for her.
And maybe you’re in the same boat – you’re looking for a diamond in the rough that you can buy a great price and then you can fix it up the way that you want.
The tricky part is making sure you don’t get stuck with a money pit.
He has three decades of experience with the real estate agent side as well as home renovations.
In this episode we’ll discuss:
- Differences Between buying a house that’s new construction vs resale
- Spotting great and still affordable neighborhoods
- Finding a fixer-upper (instead of being stuck with a money pit)
Let’s get started!
Resources on Buying a House
If you’re looking to buy, here are some resources to help you find an affordable place you love!
- Best Budget and Money Apps: Personal Capital, Tiller, Mint
- Grow Your Stash Faster: High Yield Savings with CiT Bank
- Jumpstart Your Marriage and Your Money
- My friend was about to buy a million-dollar house with no research
- What You Need to Know About Mortgages
Thank You to Our Sponsor Coastal!
Support for this podcast comes from Coastal Credit Union! If you’re living in the Raleigh Durham area and looking to bank better, come check out Coastal today.
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Buying a House in a Seller's Market
Elle Martinez: I don't know how things are in your area, but here in Raleigh, if there is a strip of land, they will build on it. We have new developments coming up around our neighborhood, across the city, and we've noticed that our home property value is rising and that can be a good thing.
But it also means that if you're buying new, the prices are going to be much higher than when we first got in the first time we went house hunting.
My husband and I went with a new construction. It was in a townhouse on the north side of the city.
The second time around we went with an older home a little bit closer to downtown, more convenient for how we live now.
And there are noticeable differences with buying new vs. a resale. So if you're hunting, you may be wondering what's the best option for you? And Lewis was sharing that with the new construction there's going to be an additional expense.
Louis Guillama: Obviously, when you buy something that's new. You got to pay a slight premium on that as opposed to buying something resale.
And there are quite a few differences between new construction and resale home when it comes to the pricing, character development of the property and the neighborhood in general. So there definite considerations of any home buyer should make.
Buying a Home with an HOA
Elle Martinez: And also with new developments, you're looking at potentially having an HOA. While some may have very strong feelings about them, particularly negative. Lewis pointed out how they can work to your benefit.
Louis Guillama: And so historically, HOAs will be enforced when a new development forms and then they may tend to expire after a period of time. And that tends to be 20 to 30 years unless they're renewed by covenants.
Most every new development will have an age away. And that's not necessarily a bad thing that really aids the neighborhood and its development and the culture that it forms. Because, you know, you have all these different personalities and, you know, moving into the neighborhood so it can go in any of any number of different directions.
It kind of put rails on it and kind of guide the development, the neighborhood. The city can't change colors. This has to be uniformity and a structure. You can't park commercial cars in front of the house. So you're are not necessarily a bad thing. You can help.
They were developed to where it was intended to go. That can be problematic for some people, you know, if they have a larger number of pets than is typical.
Now, I just met someone and they had six dogs. So that may not be permissible, but the most age ways. But there are some areas that they can find a nice home.
Elle Martinez: So if you're considering buying a home with an HOA, take some time, do the research and better understanding not just with the costs, but what you're getting out of it.
Louis Guillama: Those covenants are recorded at the inception of the neighborhood. They get recorded at the Register of Deeds so anybody can go into the public records at the Register of Deeds of County and then do a search by the name of the HLA. And if you look at the names the way whether it's Wakefield Plantation or Brian Creek searching there and you'll see the provenance come up and then just read the covenants that are that apply your property.
How to Spot an Up-and-Coming Neighborhood Before It's Popular
Elle Martinez: It's very tempting to buy into a trendy or popular neighborhood.
It seems like only a few spots have the best restaurants, fantastic parks and incredible schools. But if you're determined to live in a particular neighborhood that's really popular right now. Expect to pay a premium in something to keep in mind is when you buy into a popular neighborhood.
It's not always going to be the best move for you or your finances.
Louis Guillama: The best thing that I can recommend to finding homes with good value and good neighborhoods is to look at at a longer track record than what's trending today.
You know what I have seen in my experience and we're talking 20 years in the real estate business, is that neighborhoods and areas so that everything operates on a cycle. So, for example, here in the Raleigh area back in 2005, the Wakefield location neighborhood was immensely popular.
Everybody wanted to live in that neighborhood. Homes were selling for up to two hundred dollars a square foot today.
Now we're almost 15 years removed from that. And we encounter people that aren't able to sell their homes because of the price that they paid moving into it. It was they who I actually bought at the peak of the market in a really bad neighborhood. And so they paid a price. Now, obviously, there is value in use and value and trade. Right. So we got a lot of enjoyment out of it with a great neighborhood. Got some prestige and cachet out of it. But now value in trade is not as high as they'd want it to be.
Elle Martinez: So what do you do? How do you find these gems are hit in spots and neighborhoods?
Louis Guillama: What I always recommend to people is pick an area that's convenient to you that supports your your particular lifestyle is close, close proximity to your work into the places that you normally visit, and then don't buy the most expensive home in the neighborhood. Don't buy the prettiest home in the neighborhood. I always recommend look for the home that has. No, that's not the shiny new coin in the neighborhood.
Finding a Fixer-Upper (and Not a Money Pit)
Elle Martinez: Finding those diamonds in the rough or another way they say them fixer uppers. If you ever watched House Hunters, you've probably seen this, a couple looks at a home and they start making comments about the place and sometimes it's a legit complaint. They notice maybe the AC unit isn't in good working condition. Most times they complain or compliment all those surface finishes, the appliances, the countertops, the flooring in my favorites definitely have to be the couples who hate the paint. When I spoke with Lewis, he told me that time and again people buy based on what they see, which is understandable. But if you're trying to get a great deal, you need to focus deeper on the crucial areas of the home.
Louis Guillama: Everyone's maintenance issues is predicated upon your purchase decision. You have to look past your first initial or your emotional response to the property because we're all visual, right? And so people will walk into the property and they're basing their opinion, they're forming their opinion on the property based on what they see. But they're not really looking at the details behind the property. So the three key components to every home, there's the foundation and structure. Yeah, mechanicals and plumbing is like your air conditioner to your hot water heater as well as the plumbing pipe itself. And then you have the surface finishes, which is what we're really responding to when we enter a home. Look at the wood floors, look at the quality, the cabinets, the paint surfaces, etc. And I encourage buyers to take a close look at the foundation and the structure, make sure that that is sound and that'll be determined by any competent home inspector. I always recommend doing a home inspection, even in new construction homes.
Elle Martinez: So this I can tell you from personal experience, he is absolutely right.
Our first home, that new construction. Yeah, we thought we could save some money because it was brand new and not have a home inspection. Well, sometimes when you see these builders come in and have developments go up quickly, the quality isn't what you expect. We saw things here in there that weren't done right the first time. And when it came time to sell. Another issue was evident. The window seals were broken.
We pretty much had replace all but one window, which is kind of ridiculous because at that point the home was about five years old. So you better believe that the next time around we did have a home inspector and we followed him closely with this house. When we came in, we immediately loved it. He loved the layout. The natural light in overall location. But the basement. There was so much potential. But between with the home inspector found in ourselves comfort level. We saw we needed to make a pretty major repair if we planned on finishing and using it. If we bought as is, while we technically could have still afforded it, money would have been really tight for a while. Instead, we took that information we got from the home inspector and our agent negotiated a lower price. It allowed us to get the basement properly fixed, keep the mortgage affordable, and now have an awesome home office space for both of us, which is a huge win in our book. So if you looking for a fixer upper, it pays well to well pay someone to dig into your potential home so you can avoid a money pit.
Louis Guillama: Then if you don't want a you know and trap yourself in a money pit, you want to make sure that the mechanical systems of the property have been updated to make sure that the air conditioning is in good shape and in working order. And that is one key component that a lot of people allow their home inspector to test. I always like a man to get an H bag or air conditioning specialist. Take a look at it, because they, unlike a home inspector, was just going to measure the temperature of the air that's going into and out of the system will actually just take off the top or connect all the gauges and make sure that it's functioning the way it was intended. That's where you really encounter the money pit situations where you purchase a house because it looks cosmetically, it looks fantastic, but the underlying support systems are old and not functioning properly and you're constantly putting money into them. And air conditioning in particular can be very expensive. I mean, your typical HD back service call is about 300 hours, so you're not going to get away from from a cheap service call when it comes to HIV problems and you'll normally go to three or four of them before you decide ultimately to replace it.
Elle Martinez: And so that's a sure way to avoid the money that you're really hammering in on this, because how you buy a home will have a huge effect when you go to sell your home.
Louis Guillama: I recommend for people is not to be attracted to the prettiest looking house in the neighborhood. You have a lot of investors that go into the, you know, trendy neighborhoods and they will do cosmetic updates to replace kitchen cabinets so that they'll be finished the floors they've given. Yup, it looks really beautiful, but the underlying portions of the house, the foundation, the plumbing system, the mechanical are not in the best condition. And so people are paying a premium because it looks great. But over time, it creates maintenance problems for them and they're really not going to derive as much benefit for them because when they go to resale, it's not going to be looking like that because they're not going to spend the money updating it. And so you pay a premium for looking great. But then when it comes to resale, the prices drop a little bit because now it's more used. Right. The same thing happens with new construction properties. A lot of people think that they'll buy a brand new home and then maybe in three to five years they'll sell it and move somewhere else. Well, in reality of new construction, there is a very large premium between new construction and resale properties, and that could be as high as 20 percent. And so what happens is within the first three years, at least in most areas, your property is actually declined in value from what you paid for it. You have to wait until the resale market comes up as it appreciates and reaches your price point, your entry point in that new construction home.
And then it will continue appreciating along with the rest of the market, because the day after you move into a brand new home, now you're in a resale property because you're the only people that can sell new construction or builders. And that's it no matter what you do to it. Even if you completely renovate your home, you're still in there compared to the resale market. And that market is selling at a slight discount from new construction. So, you know, I work with a lot of buyers that we would go look at houses and then we'd simply fall in love with the houses that investors, the savvy investors have just clean them up, made them look nice and shiny, and they're willing to pay top dollar for those. But if they look past that, look at their house in the same neighborhood, that maybe hasn't been updated. The structure is the same as the shiny new one, that maybe the flooring has to be replaced or the paint needs to be redone. You could save a considerable amount of money in that mine in my 20 years or actually now 30 years of homeownership. I have never bought the prettiest or nicest home in the neighborhood. I will look for a quality neighborhood and I'll buy the ugliest property that I can find in that neighborhood. This suits my lifestyle and then we'll go ahead and fix it up and you can recover so much wealth that way. Just five minor updating and just improving the presentation of the problem.
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