Fixer-Uppers

  • Eva Swersey
  • 04/5/22
 

Are Special Tax Breaks Available for Historic Rehabilitation?

Certified historic structures now enjoy a 20 percent investment tax credit for qualified rehabilitation expenses, if they are income-producing properties. A historic structure is one listed in the National Register of Historic Places or so designated by an appropriate state or local historic district that is certified by the government. The tax code does not allow deductions for the demolition or significant alteration of a historic structure.

Many states offer tax incentives, reductions, and abatement programs for owners of residential historic homes. These programs are described on the National Trust’s website.

Does the Federal Government Offer Home Improvement Programs?

Yes. Among the most popular:

  • Title 1 Home Improvement Loan. HUD insures a loan of up to $25,000 for a single-family home and lenders make loans for basic livability improvements – such as additions and new roofs – to eligible borrowers.
  • Section 203(k) Program. HUD helps finance the major rehabilitation and repair of one-to four-family residential properties, excluding condos. Owner-occupants may use a combination loan to purchase a fixer-upper "as is" and rehabilitate it or refinance a property plus include in the loan the cost of making the improvements. They also may use the loan solely to finance the rehabilitation.
  • VA loans. Veterans can get loans from the Department of Veterans Affairs to buy, build, or improve a home, as well as refinance an existing loan at interest rates that are usually lower than that on conventional loans.
  • Rural Housing Repair and Rehabilitation Loans. Funded by the Agriculture Department, these low-rate loans are available to low-income rural residents who own and occupy a home in need of repairs. Funds are available to improve or modernize a home or to remove health and safety hazards.
     

How Can I Finance the Work Needed on a Fixer-upper?

According to the Millennial Housing Commission created by Congress, few lenders are willing to administer home improvement loans. Most prefer to make home equity loans or unsecured consumer loans because they are easier to manage. Home improvement loans usually require inspections and irregular draws on the loan amount as work is completed, which requires regional or national lenders to find local partners to provide oversight.

Financing repairs and improvements with home equity is okay for most homeowners, but it is difficult for many first-time buyers. They have lower incomes, smaller savings, and have made lower down payments on their homes than first-time buyers a decade ago. So they have little equity to borrow against. Unfortunately, it is often lower-cost older homes purchased by first-time buyers that need the most work.

Unless you have a cash reserve, you will have to shop around for the best borrowing terms. In addition to the options listed above, you can ask relatives for a loan. Borrow against your whole life insurance policy. Refinance your existing mortgage. Get a second mortgage. Contact the government about home improvement programs. And – only as a last resort – borrow from a finance agency, which generally tends to charge high rates.

How Do I Determine the Value of a Distressed Property?

One of the best ways is to get your hands on a comparable market analysis. See what price similar properties have sold for in the past and find out the listing price of others currently on the market.

It is important to examine the fixer-upper carefully and figure out how much it will cost to fix any defects or repairs. If you are unable to get in, talk with nearby neighbors about the home’s condition.

You can also do your own cost comparison by researching comparable properties recorded at the local county recorder's and assessor's offices, or at Internet sites specializing in property records. If the property is in foreclosure, you should get as much information as possible from the lender.

Is Buying One a Good Idea in “Bad” Areas?

It depends. So-called “bad” areas – often described as those that are residentially unstable or poor – have offered an affordable means of homeownership for many – particularly young, first-time buyers and low- to moderate-income families interested in a home they can call their own. Whether it is right for you to buy a fixer-upper will depend on your personal threshold for risk and your level of tolerance. That said, however, many run-down neighborhoods, particularly those close to downtown, are benefiting from a residential resurgence as an influx of newcomers jump-start what were once staid, unsafe, or depressed areas

What About State and Local Governments?

Just about every state now offers loans for renovation and rehabilitation at below-market interest rates through its Housing Finance Agency or a similar agency. Call your governor’s office to get the name and phone number of the agency in your area.

At the municipal level, many cities also have programs for special improvements to certain blocks and neighborhoods they are trying to spruce up. Call City Hall, as well as a Community Development Agency in your city

What Guidelines Should I Use to Find a Contractor?

Chances are you will need plenty of help making those major repairs and additions. But the last thing you will need is someone who fails to complete the job or botches it up. Finding good, responsible help is imperative.

Here’s what you can do:

  • Avoid the Yellow Pages. Check with family, friends, neighbors, and co-workers for recommendations.
  • Deal only with licensed contractors. The state licensing board and local Better Business Bureau also can tell you if there are any outstanding complaints against the license holder.
  • Interview each contractor, request free estimates, if possible, and ask for recent references.
  • Ask for proof of worker's compensation insurance and get policy and insurance company phone numbers so you can verify the information. If the contractor is not covered, you could be liable for any work-related injury that takes place during the project. Also, check to make sure the contractor has an umbrella general liability policy.
  • Never hand over a deposit at the first meeting – you could end up losing your money.

What Kind of Return Can I Expect From Home Improvements?

This will vary depending on the type of work that is done. Remodeling magazine publishes an annual "Cost vs. Value Report'' that can answer this question in more detail, based on the top 15 home improvements. A recent study conducted says the highest remodeling paybacks have come from siding and window replacements, major kitchen remodeling, bathroom and family room additions, and mid-range master bedroom suites.

An important point to remember is that remodeling not only improves a home’s livability, it also enhances its curb appeal to future buyers.

Where Can You Find Fixer-Uppers?

They are literally everywhere, even in wealthy enclaves. What sets them apart is price. They have lower market value than other houses in the immediate area because they have either been poorly maintained or abandoned. To determine if a property that interests you is a wise investment will require a lot of work. You will need to figure out what the average home in the area sells for, as well as the cost of the most desirable ones.

Experts suggest that novices avoid run-down properties needing extensive work. Instead, they recommend starting with a property that only needs minor cosmetic work – one that can be completely refurbished with paint, wallpaper, new floor and window coverings, landscaping, and new appliances.

Also, keep in mind that a home price that looks too good to be true probably is. Find out why before pouring your hard-earned money into it.

When looking for a fixer-upper, some experts suggest you follow this basis strategy: find the least desirable home in the most desirable neighborhood. Then decide if the expense that is needed to repair the property is within your budget.

 

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Eva helps busy consumers in or near the city find homes in the suburbs. She offers information about the local real estate market and tips and tricks to help home buyers and sellers achieve their real estate goals.

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