Should We Buy A Sonoma County Fixer As A Primary Residence?
October 27th, 2009 categories: Buyer Resource, Foreclosures, Seller Resource, Short Sales
We were recently asked about buying a Sonoma County Fixer as opposed to buying a home with the improvements already made. This is really a great question, and one that brings a lot of Real Estate buying fundamentals into play.
Here is the situation: Our clients had a significant amount of cash on hand (around $100,000), and were interested in purchasing a Sonoma County Home. They were going back and forth about an issue that many of our readers may have also contemplated; whether or not to purchase a fixer or to purchase a home that does not require any work.
Purchasing a fixer allows the opportunity for the buyer to add value to the home with sweat equity. Conversely, purchasing a home that does not need repairs is more convenient for buyers who may not have the time, or know how to complete needed repairs. Is there anything else to consider other than the time involved? We think so…and here is why.
When contemplating a fixer versus a home that does not need repairs, there are several things that need to be considered:
- Price Of The Home To Be Fixed
- $ Amount Of Repairs Needed
- Price Of Home That Does Not Need Repairs
- Loan Amount
- Down Payment Amount
- Cash On Hand
- Time For Repairs
- Who Will Be Completing The Repairs
- Do The Repairs Need Permitting?
Let’s look at a mathematical example:
Home A: Fixer which costs $250,000.
- Down Payment (10%) – $25,000
- Closing Costs (1.5%) – $3,750
- Repairs – $50,000
- Time For Repairs – 30 Days
- Value After Repairs – $325,000
- Cash On Hand 90 Days After Closing (After Repairs) – $21,250
- Annual Mortgage Amount – $1,5330.36
- Real Estate Taxes (1.15%) – $2,875
Home B: Home that does not need repairs, and costs $325,000.
- Down Payment (10%) – $32,500
- Closing Costs (1.5%) – $4,875
- Repairs – $0
- Time For Repairs 0 Days
- Value – $325,000
- Cash On Hand 90 Days After Closing – $62,625
- Annual Mortgage Amount – $19,929.36
- Real Estate Taxes (1.15%) – $3,737.50
The annual savings for purchasing the Fixer equals to the difference in the annual mortgage ($4,599) + the savings in Real Estate taxes ($862.50) = $5,461.50. The difference in the cash positions, $62,625 – $21,250 = $41,375. Excluding interest, payback period is is $41,375 / $5,461.50 = 7.58 years. When interest is factored in, the payback period jumps to over 9 years. (Take our word for it…the calculations are too long to write out in this article). So, it appears that purchasing a home to fix up, when factoring in likely repair costs, may not make sense if you plan to own the home for less than 9 years.
The payback period is an important consideration for investors and the investment minded buyer. Whether you are thinking of purchasing Sonoma County Short Sales, a Sonoma County Foreclosure, or a traditionally sold home, this is a good exercise to undergo. All buyers should at least consider these types of things, as all purchases are some form of Real Estate investment.
Important Note: In general, the higher the price of a home, the fewer buyers look at it, and you may end up getting a better deal when you purchase a higher priced home.
If you have any questions regarding Sonoma County Fixers or any other Real Estate tradeoffs, please feel free to contact us.
