Real Estate Matters: Plenty can go wrong when you don’t plan contingencies in purchase

June 4, 2013

We are retired school teachers with an income of $51,000. We only have $100,000 saved, but our teachers’ pension covers our monthly living expenses.

 My husband has wanted a small farm and put a contract on a beautiful property for $367,000, and he will use his VA loan to finance it at about $2,200 a month. The closing is set for next month.

 However, when we had the property inspected, the various inspectors told us they found mold, radon and termite damage. It will cost another $40,000 to repair these items. We are buying as is, and the seller refuses to pay this.

 We are now at $367,000 plus $40,000 just to get the place livable. We have grave concerns about using our meager funds for all this. We close in a couple of weeks and are sick about doing the right thing.

 We value your opinion.

Buying a property in as-is condition means that you take it, warts and all. I’m unsure why you want to buy a property that needs this kind of work, unless you believe that you can fix it up and it will be worth a lot more than that over time.

But to use $40,000 of your available cash to fix up the property means you will be left without much in case something else happens on the property. The question is, are you sure this is what you want to do? If it is, then you have to go in with a plan for fixing it up and making sure that you have enough cash to live on.

The bigger concern is that you don’t have enough cash coming in to cover the costs of the farm. With an income of $51,000, we wouldn’t have thought you’d be approved for a loan for more than $225,000, even at today’s low interest rates. Yet here you are purchasing a property for a lot more than that.

Are there other money or assets that you are using for the down payment? And if you are using a zero down VA loan, it’s difficult to imagine that you will have a spare penny left after taxes and insurance.

If you decide that you’re in too deep, the next question is what will it cost you to get out of this deal? You have probably put down earnest money, which would be lost. If the seller can’t sell the property to someone else for the same price, you may be hit with a lawsuit for damages.

The thing to do now is to think about what is going to happen over the next five to 10 years. If in five years you can see yourselves living on this farm and loving it, then set aside your fears and move forward. You are locking in a loan at the lowest possible interest rates in history, so going forward you know exactly what you will be paying. If you are retired, you always have the option of working a little to bring in extra cash.

In a few years, if you decide owning a farm isn’t for you, you can always sell at that time. But at least you will have given it a shot and will have no regrets over missed opportunities. As you move into retirement, that’s quite valuable.

This is a great lesson in the value of planning. Whenever you buy an old property, you have to expect there will be things you have to do to keep up and improve it, whether it is a new roof, septic system, mechanicals or just replacing appliances. If you can’t afford to keep up the property over 10 years, and make some of these improvements, then it’s probably too expensive.

Ilyce R. Glink is the author of many books on real estate and host of “Real Estate Minute” on her YouTube.com/expertrealestatetips channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.

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Dion Haynes · June 3, 2013