Saving while buying a house
The best way to make money when you sell a house is to get a good deal when you buy it. In this article we are going to look at some tips and strategies for getting a good deal on a house when you buy it.
The first rule of frugal house buying is to make sure you get a good inspection--or maybe even two. You have to know what type of shape the house is in. There may be hidden problems and issues that you won't see. In fact you should expect to have some issues that you don't see and even some that the inspector will miss. Take the time to make sure you catch as many of them as possible when buying.
Inspections do two things. First they let you know what you will need fix and may uncover a deal breaker that will show you don't want the house in the first place. Second they give you a very powerful negotiating tool with the seller. Sales contracts are usually written to say "subject to inspections" so often once you think you've gotten the best price possible, you can get the seller to go lower with an inspection report.
Inspections typically cost $300 to $500 depending on what you have inspected. This may seem like a lot of money, but given the chance that they may discover a problem that will cost $5,000 or $10,000 to fix, it can be a very good investment. If you plan to inspect a number of houses, you may be able to work out some type of quantity discount with the inspector to do 3 or 4 houses all at once.
In addition to inspections, you want to get quotes on fixing the issues found. Ideally a solid quote for fixing the problem from a mid to high priced contractor will give you a good bargaining tool. Lacking that you at least want an estimate for fixing things to use in negotiating the price and for your planning.
Handy Man / Handy Woman
If you are handy, some problems aren't as big of deal as other. For example, I am pretty good at doing electrical work on the houses I've owned. In fact, I prefer doing my own electrical work because I tend to be even more careful and follow more stringent codes than local electricians. However, I am not good at plumbing. So for me an electrical issue isn't that big of deal, but plumbing is going to be much more expensive to fix.
Make sure you understand what you are capable of. Just because you've watched someone redo the drywall in their living room doesn't mean you are going to have success with it. I'm not saying you shouldn't learn on your own home, but be realistic about what you can and can't do.
The ideal situation is to find a house with deficiencies that match up perfectly with your skills. For me a house that needs some electrical work is a better deal than a house with an equivalent dollar amount of plumbing work. I can do the electrical but I'm not comfortable with plumbing. If you know how to refinish wood floors, a house with ugly carpet and damaged wood floors could potentially be a good deal because you can apply your expertise to make the floors beautiful.
Houses that need fixing up
Be careful about houses that require too much fix up. You need to make sure you won't run out of cash to make the repairs. The rules for refinancing have become much more stringent since the housing bubble burst and many lenders have gone out of business. For example, if you buy a house for $100,000, put $50,000 and a lot of sweat equity into fixing it up to the point that it appraises for $150,000, you still won't be able to refinance and get your cash back out for 6 months. Further, you use to be able to get a good deal on a house and take some cash out to do fixup work based on the house value. This isn't the case anymore. Banks will only loan you the lesser of the selling price or the appraised price.
In an appraisal, a knowledgeable expert comes by looks at and measures the house and then uses a computer program to calculate its value based on other houses that had sold in the area. The bank will require an appraisal before loaning you money. A possible strategy to make sure you are getting a good deal is to get an appraisal before making an offer on the house. This runs some risk because someone else might buy the house while you are getting it appraised. However, it does give you a good idea of what the house is worth.
One strategy would be to order the appraisal through the bank that you intend to use as a lender. This way you can use it when it is time to get the loan. However, another strategy would be to hire an appraisal from an appraiser known for giving low values, using it to negotiate the price and then getting a different appraisal through the bank. You can't hid the fact from the bank that you got a lower appraisal, but since the bank can't use the one you ordered anyway (they have to order their own) it isn't likely to change their opinion of the value. Keep in mind though that you can't borrow more than the selling price anyway so this isn't an opportunity to get cash out.
The downside of course is that you have to pay for the appraisals as well. They cost in the $300 range. Still this can be a possible strategy for negotiating the price as low as possible. Another possible advantage of having a very low appraisal is that it can be used to contest the county valuation of your house and possibly lower your taxes for a few years. In some places your property taxes can't go up by more than a certain percentage per year, so starting at the lowest point possible is very advantageous.
Negotiating the selling price of a house
Pretty much everything is fair game. I've heard of buyers making an offer, but it was contingent on getting the previous owners car as well. In another example, they made an offer for the house and the Golden Retriever in the back yard. These probably aren't win situations for the new buyers, but it gives you an idea of how much can be negotiated. More frugal options would be to make an offer, but require that the previous owners leave the curtains and appliances. You might also stipulate that you want a large hanging mirror or other decorative items left with the house. The trick is to find things that the sellers are going to be happy to not have to move. For example, custom curtains probably won't fit at their next house. The wife may be happy to get a new washer and dryer and the husband maybe happy to not have to move them.
You can stipulate that they fix certain things as part of the agreement. Just be sure to make the stipulations very clear so you get a good job done. For example, you might stipulate that the roof be repaired by a licensed contractor or that the carpet be replaced with a specific type of carpet. The problem with these types of stipulations is that the current owners just want to get out of the house and would probably rather give you a discount than deal with the contractors themselves. The downside of a discount is that if they lower the price, you can't borrow extra in the mortgage beyond the purchase price to pay for the repairs. If you have cash in hand, take the lower price and get the work done yourself.
In negotiating the person who usually wins is the person who can "walk away" from the deal. So don't get your heart set on a house. It is wise psychologically to have at least two houses that you are serious about. That way if one doesn't look like you can get a good deal, you don't accept a bad deal just because you really want the house.
Another strategy that often works well is to offer to split the difference. If they are asking $200,000 and you offer $180,000 and they say "no", ask if you can split the spread and go for $190,000.