Tips For Selling a Home in Terrible Condition
Are you looking to sell a house in bad condition? The sad reality of life is that homes can fall into a state of disrepair or even worse, become uninhabitable. This happens for a number of reasons, including unfortunate circumstances like health problems, job loss, natural disasters, or a combination of all of these.
When people find themselves in this situation, selling their home is often the best option to getting out from under their financial stress. Unfortunately, this can leave them vulnerable to those looking to take advantage of their situation, or just making a bad decision.
If you find yourself in this situation and are confused about what your options are for selling the property and getting as much money out of the deal as possible, you do have options, you just need to take a little time to understand what they are.
Distressed or Uninhabitable Properties
Let’s start with the worst-case scenario, the uninhabitable home. These are homes that are unsafe to live in and in many cases, these properties could be on their way to being condemned. Condemnation happens when the local government entity responsible for housing code violations deems the property is unsafe to live in.
Once a home is condemned, no one is able to live in the property including the owner, until the appropriate repairs have been made. When it comes to selling a house in bad condition these are typically the worst of the worst.
Some of the things that make the home uninhabitable include, major problems often caused as the result of years of deferred maintenance and neglected repairs. Natural disasters like fire, floods, tornados, and hurricanes can also contribute to creating an inhabitable property.
In many cases, homeowner’s insurance can help cover the costs of making things right after a natural disaster but it won’t help with man-made issues like neglect, methamphetamine production, or mold from marijuana grow houses.
These homes can also see structural issues like cracked, heaving, or moving foundations. In cases like this, insurance will not cover damages related to structural issues unless they are directly related to a natural disaster that is specifically covered in the policy.
Roof damage is another problem, damaged, leaky roofs can be expensive to repair and allow water into the property which can start the production of things like black mold.
Non-functioning systems like electrical, HVAC, and plumbing can also make a home inhabitable. These systems are expensive to repair and are not covered by insurance.
Black mold is a toxic mold that causes serious health issues when found in high concentrations. You cannot live in a house with black mold because it leads to allergic reactions resulting in vomiting, bleeding nose, and lungs. This is why houses with black mold are considered unlivable. You need to understand your responsibilities if you are going to sell a home with black mold.
Lead-Based Paint was used in homes built before 1978. If left undisturbed, lead-based paint poses a minimum risk, but if it is sanded or chipped, inhaled, or ingested it can lead to brain damage, damage of vital organs, seizures, death, and even behavioral issues.
While lead-based paint in and of itself is not a big deal if the home is distressed and requires repairs and renovations, the presence of lead-based paint can make matters worse.
Asbestos much like lead-based paint can be hazardous, especially if the fibers are inhaled. If the asbestos fibers become airborne or have the potential to become airborne, they are a problem. Like lead-based paint, asbestos in an undisturbed state isn’t very problematic, it can become a huge obstacle when it comes to renovations to the home. Mitigation must follow strict standards, and this process is expensive.
Termite infestation can lead to foundation problems, doors and windows that won’t close, and other major issues, especially if repairs are not done quickly. Damages caused by termites can be costly but should receive immediate attention.
If you do not do the repairs, the damages can be severe. Selling a home with a termite infestation comes with certain requirements, especially if the buyer is using an FHA loan. The FHA has stringent guidelines around termite inspection requirements for existing homes.
Serious Chimney Issues, serious chimney issues include creosote, obstructions, damaged crowns, cracks in the flue, and brickwork issues. If this is the case with your chimney, living in the property can be dangerous both from the standpoint of the inside air you breathe and the risk of sections of the chimney falling through the roof.
There are a ton of potential problems that can lead to a home becoming uninhabitable, these are just the most common.
The primary objective should be to determine if the home is uninhabitable or simply in poor condition. A home that is simply in poor condition will have a lot more options when it comes to selling.
Properties in Poor Condition
In many cases, there is a fine line between an uninhabitable property and a home that is simply in poor condition. The primary factor that differentiates these two types of properties is the soundness of the structure.
You can think of the poor condition home as the final stage before uninhabitable. problems left unaddressed only get worse leading to further deterioration and ultimately major problems.
Issues found at the poor condition-stage are serious but don’t make the home uninhabitable. Therefore, you may live in such a house, but it is certainly not pleasant or necessarily safe.
Some of the issues associated with this house include damaged floors, failing HVAC, foundation issues, Ice dams, serious plumbing issues, minor electrical issues, rotting wood, damaged and outdated kitchen or bathrooms, and damaged and/or non-functioning faucets / light fixtures.
Properties With Deferred Maintenance
A house at this level is livable since the issues associated with it are minimal. For you to sell a house with deferred maintenance, some repairs are required. Also, these houses have no health or safety issues.
Some of the deferred maintenance cases include; dated kitchen, peeling paint, dirty cluttered interior and thick hoarder, dated bathrooms, outdated finishes on faucets & light fixtures, dirty walls, dead overgrow untended landscaping, dirty, stained flooring, and weathered exterior.
How To Sell a Distressed or Uninhabitable Property
No matter how bad the condition of the home, the first option should be to see if you can make the property right by doing any needed repairs. Easy enough to say but that option costs time and money, both of which are usually in short supply in these scenarios.
Your first move should be to figure out what the numbers look like. Is there enough equity in the home to cover the cost of repairs plus additional profit for you after the sale? Or, is the cost of repairs greater than the potential sale price of the property?
If the cost of repairs and renovations exceeds the realistic sales price of the property, your options are clearer but limited. In this scenario, you’re going to be looking at what is called a “Distressed Sale”.
In a distressed sale scenario, you will most likely be looking to work with investors; investors should be willing to pay cash for your home in its current condition. This allows you to sell the house without having to deal with the property condition requirements associated with a sale involving a traditional mortgage.
The primary concern at this point becomes your existing mortgage. If you have a loan on the home and the investor cash offer is less than what you owe on your mortgage, you’re still responsible for the remaining balance. Not fulfilling this obligation could result in the lender pursuing a foreclosure.
Distressed Sale Options
When a house is considered uninhabitable or in poor condition, very few retail buyers will even look at the home, so you will be looking for investor buyers.
A retail homebuyer is someone that is buying a home they will actually occupy. We work with a lot of retail home buyers that are looking for Homes for sale in Colorado Springs. These are the type of buyers that make up most of the home buying market.
Retail buyers will generally be using financing to make the home purchase. 94% of all home purchases in 2020 used one of the three basic mortgage programs, Conventional, FHA, or VA loans.
Each of these loan types has minimum condition standards about the type of property they are willing to lend money on. In most cases, a home in uninhabitable or poor condition won’t meet those standards, unless the buyer uses one of the several special FHA 203K or Conventional rehab loans available to consumers.
Most retail buyers are looking for a home, not a project, so the pool of potential retail buyers for distressed properties is very shallow.
This means owners of Uninhabitable and Poor Condition Properties are looking primarily to investors to purchase their properties.
Investors will often purchase with cash, eliminating the FHA, VA obstacles. The investor buyer will be looking for a deep discount and if there is enough equity in the property, you may be able to work with this type of buyer.
The first type of investor client we will look at is the Wholesaler. These are the investors who put out the “bandit signs” around town advertising to “Buy Your Home For Cash”.
While this may feel a little sketchy, depending on your situation, it might be a good alternative. Selling a home for cash to an investor is actually quite commonplace when selling a home in bad condition.
Certainly worth talking to them, just remember, they are looking to make money off of your hardship. Get a number from them but don’t agree to anything until you do more research. This will most likely end up being your “worst-case scenario”.
This should be the next option you look into. iBuyers are institutional buyers. They are essentially the wholesalers just online and without the bandit signs. These are companies like Zillow instant offers, Opendoor, and a multitude of new players.
iBuyers will make a preliminary cash offer but follow up with a property inspection. It’s important to note that after the inspection, the number they are willing to offer you may change based on the cost of repairs.
Traditional Sales Route:
Taking the traditional sales route can also be a good idea. Work with a Realtor, establish an attractive price by looking at the comparable sales or “comps”, and list the home for sale in the MLS.
In many cases, you can find a buyer that is willing to purchase with either cash or by using one of the many rehabilitation loans available to qualified buyers with good credit. This route will most likely take longer but at the end of the day could potentially net you more at the end of the deal.
Depending on the type of market you are in buyers may actually bid up the price of your uninhabitable listing. In strong seller’s markets, buyers jump on discounted properties.
Many times the thought of a deal will motivate hungry buyers to overpay in an effort to win the deal. While this is not necessarily a strategy you should count on, it is nice when it happens.
Selling a Home With Deferred Maintenance
A home with deferred maintenance is potentially a much easier sale to make than a distressed property.
Much of the work required by this type of property can be completed by the homeowners themselves. If there are problems, there are usually less extreme than those found in a distressed home.
The best option for a home with deferred maintenance issues is to try and bring the house back into good condition so that it can be sold. This means lots of cleaning and decluttering.
Once the home it’s presentable, you should get a pre-listing property inspection. The inspection will reveal what potential problems a buyer will ultimately end up discovering when they do their inspection.
Once you discover the big items that need to be repaired you’re going to need to figure out a way to pay for them. There are a couple of simple options available.
Traditional Home Improvement Loans and Lines of Credit
Home improvement loans
One option for financing a renovation is through a home improvement loan. These are personal loans that are unsecured and are offered by most banks.
Interest rates for these loans are based solely on credit score and the funds are available almost immediately, once you are approved. These loans also allow for shorter repayment timelines.
The only drawback to home improvement loans is that they come with higher interest rates when compared to home equity loans and home equity lines of credit (HELOCs).
Home Equity Line of Credit (HELOC)
If there is enough equity available in your home, you can obtain a home equity line of credit. A home equity line of credit is a line of credit that is secured by the existing equity in your home. This is a revolving line of credit you can use to make home repairs and improvements.
The HELOC is usually a lower interest rate than some other common types of loans, and the interest may be tax-deductible.
Rehabilitation and Remodeling Loans
Most of the financing options available for rehabilitation & remodeling are geared towards home buyers, not sellers.
For example, the FHA 203K program is a great program, but it requires the borrower to occupy the property after the repairs and renovations are complete.
If you are planning on staying in your property for a while after fixing it up, this type of loan might work but talk to your lender about your plans, you don’t want to deal with the problems that arise from using this loan incorrectly.
Fannie Mae HomeStyle® Renovation
The Fannie Mae HomeStyle® Renovation is a loan product that combines a home refinance with home improvement financing all in one loan with one closing. This is a conventional loan program that boasts rates as low as a HELOC.
The occupancy requirements on this loan make it a better choice for someone looking to fix up their home in order to sell. Because this is not an FHA product, the qualification requirements are more stringent but if you qualify, this is a great way to get your home back to beautiful.
Sell in “As is” condition
If your situation prevents you from pursuing any of the fix-the-house-up options, you might consider an “As-Is” sale. In this scenario, you would list the property for sale at a bargain sale price. It’s important that you disclose what you know about the property, but stipulate that you have no intentions of making any repairs.
If the price is attractive enough, it could attract buyers that are willing to do the required work in order to get the deal. In some cases, the buyers may even bid the price up. Do your homework before attempting an as-is sale, there are a number of best practices you should follow.
It’s important to remember your commitment to your mortgage holder, in other words, you can’t sell the property for less than you owe on the mortgage. Since this type of situation doesn’t meet the requirements to do a “Short Sale”, you will need to be aware of what your numbers are.
If you sell for less than you owe the mortgagor, you are still responsible for the balance. Failing to pay this off could result in a foreclosure, and this can just prolong your misery.
Selling a home in bad condition is clearly not easy, but there are options available. From wholesalers that post bandit signs on the side of the road to HELOCs, and conventional rehabilitation loans. Simply walking away from the property should be your very last option.
It is also important to seek the advice of real estate professionals, from mortgage lenders, and bankers, to Realtors. You never know where your solution is going to come from, the more options you look at, the more likely you are to come out ahead.
Hopefully, you have found this information on selling a house in bad condition to be useful.