I want to buy my neighbors home

[cgallagher]

My neighbor has offered his home to us for a very low price. The home could probably sell for north of $260k and he has offered it to me at a no no realator, no improvement $200k. It probably needs $10k in upgrades. The home would be a nice move up from our 1100 sq ft home to 2300, especially with the baby coming. We would also like to keep the home we are in now and could easily rent it out.

I am self employed and would contract the improvements on my own. I am after all, a builder. I could put 20% down, but would like to only put down 10% and save the money for improvements.

What are my options for financing this in the current loan market? I have good credit score (740) and no debt, but I see that most stated income loans want 25% down.

The home we have now is in my wife's name, so I would want to buy the new home in my name.

Any of you loan experts have any advice?

Edited December 4, 2008 by cgallagher

[TJones]

How long have you been with your bank ? I would go to them first, and tell them the situation. 740 beacon and provable income, and never late on your current home, I would say that you are in. At least in the car world you are. The bank is dying for customers like you, they will most likely accept your terms.

Edited December 4, 2008 by TJones

[travelguy_73]

You might try posting on the Credit Boards forum. They have a mortgage section that was very valuable when we were researching our options.

[crunchtastic]

With 10% down they will hard sell you on a HELOC to make up the difference. Not necessarily a bad deal, because the PMI rates now apparently suck hard. I actually did just 15% on my current house, but I only felt confident becasue I was able to pay off the 2nd note in a year.

I would not do the same thing in the current environment. Besides you'll get the best rate with full down on a single note. According to my peeps at USAA's bank, you could expect to pay as much as 2 point premium on your first mortgage for a low down + heloc. And that's with 740-760 plus. And on the other hand, a single note with 10% down, PMI has gone up over 2 points per $100,000. Yikes. Caveat--This is all from my colleagues who still work there, so I'm not sure about other banks. But it's a good comparison. I do know that they are very conservative on PMI, so you can probably do better elsewhere when it comes to that. But I'd think your primary concern is the rate on the note. Personally, if the house if livable, I'd put full down and just start banking cash for reno. You'll be able to get a killer rate.

[TheNiche]

It sounds like you're going to be there for a very long time. If this isn't just a temporary arrangement then Crunch's advice is sound. One note, low interest rate, 15 years or fewer (depending on what you can afford). In the long run your interest expense will be much lower and your personal balance sheet will be much improved.

If either of your homes has a HELOC, it would adversely impact your ability to take out a home improvement or home equity loan, if you needed one. It sounds like you would be able to capture $60,000 of equity from arbitrage. If that is reflected in the appraisal, and you've put $40,000 down on the note, then I really can't imagine how you would have difficulty getting a short-term home improvement loan.

Edited December 5, 2008 by TheNiche

[cgallagher]

Does the bank recognize the captured equity from the potential purchase? Therefore reducing the amount of the down payment. Or is 20% down based on the amount requested?

We don't have a HELOC currently. But I can see the benifit in that for improvements. Thanks for the replys.

[tanith27]

A home is only worth what someone is willing to pay. In this case, you're paying 200K so thats what its worth according to the bank. I highly recommend putting down at least 20% to avoid PMI. If you feel you can't at this point, you could get a reappraisal done after the fact and hope the appraiser thinks its worth as much as you do. However, in my previous experience the mortgage company wont accept any appraisers estimate for at least 2 years, so you'd be stuck with PMI for at least that period.

[TJones]

A home is only worth what someone is willing to pay. In this case, you're paying 200K so thats what its worth according to the bank.

WHAT ? You better talk to a bank and the county tax appraiser on that one Tanith.

I bet you think your Cavalier is worth more than what someone is willing to pay for it.

Edited December 5, 2008 by TJones

[Fringe]

What does the county appraise the property for?

[Rammer]

Something is worth what a willing buyer is willing to pay a willing seller....but ONLY to that one person.

The MARKET value is established by comparable homes in the neighborhood.

This value is what the home is worth to the general buying public.

You want this number to be as HIGH as possible if you are the owner.

The TAX APPRAISED value is established by HCAD...it may be completely different from the true market value. You want this number to be as LOW as possible for tax purposes.

Tanith is right, you should always put at least 20% down.

My personal rule - if you can't put at least 50% down, you can't afford it.

Investment homes should only be purchased with cash(Lance Roberts).

[cgallagher]

What does the county appraise the property for?

Well currently all the homes in the area are selling higher than the county appraisals. But nobody is calling up there complaining. A similar priced, but updated home in the on the same street recently sold for 289k. My county appraisal is about 20k under what we paid for our current home, and it went up 12k this year. There have been several new construction projects in the last couple of years. It's in Spring branch area - North of Westview and South of Longpoint, but not zoned to Memorial High. I feel the property has both short and long term potential.

Edited December 5, 2008 by cgallagher

[tanith27]

WHAT ? You better talk to a bank and the county tax appraiser on that one Tanith.

I bet you think your Cavalier is worth more than what someone is willing to pay for it.

I just bought a new home for less than HCAD says its worth. Did I get a deal? Maybe. Or since HCAD has never seen my home, nor been inside it, perhaps you feel their opinions on property values are obtained by Divine Right and are therefore non-negotiable? So to that end, is it safe to assume you never challenge your property taxes each year, knowing of course that HCAD is the be-all gospel for the housing market? Hmmm. One things for sure from my side, I'm not paying taxes on this property based on what HCAD thinks its worth. They'll update their records based on my sale.

BTW, I dont own a Cavalier. I own a red sports car. And its only worth what the market is willing to pay for it.

[TJones]

I just bought a new home for less than HCAD says its worth. Did I get a deal? Maybe. Or since HCAD has never seen my home, nor been inside it, perhaps you feel their opinions on property values are obtained by Divine Right and are therefore non-negotiable? So to that end, is it safe to assume you never challenge your property taxes each year, knowing of course that HCAD is the be-all gospel for the housing market? Hmmm. One things for sure from my side, I'm not paying taxes on this property based on what HCAD thinks its worth. They'll update their records based on my sale.

BTW, I dont own a Cavalier. I own a red sports car. And its only worth what the market is willing to pay for it.

Nope, I didn't challenge my tax appraisal, because when I sold the property this year, I wanted the appraisal to be higher than what I was asking for it, and it worked.

HCAD is like a Kelley Blue Book Tanith. I am 150% positive you would pull out a KBB or NADA if you were trading your little red sportscar in and the dealership had offered $6k below KBB to take it off your hands, because that is what the auction and market bears, or do you just throw that book out the window and say, "Oh well!" when negotiating your new car purchases? If so, come see me, we'll get along just fine. And no, HCAD is not going to update their records based on what the property sells for, unless you go down to the courthouse and dispute it, but I bet you won't be disputing ANYTHING when it comes time for you to sell instead of buy. You'll be pointing at the neighbor's a couple of houses down to prospective buyers, saying things like, "Theirs is on the market for $35,000 more than mine, and it's the same house."

[cgallagher]

Investment homes should only be purchased with cash(Lance Roberts).

That guy is very smart.

[tanith27]

Nope, I didn't challenge my tax appraisal, because when I sold the property this year, I wanted the appraisal to be higher than what I was asking for it, and it worked.

HCAD is like a Kelley Blue Book Tanith. I am 150% positive you would pull out a KBB or NADA if you were trading your little red sportscar in and the dealership had offered $6k below KBB to take it off your hands, because that is what the auction and market bears, or do you just throw that book out the window and say, "Oh well!" when negotiating your new car purchases? If so, come see me, we'll get along just fine. And no, HCAD is not going to update their records based on what the property sells for, unless you go down to the courthouse and dispute it, but I bet you won't be disputing ANYTHING when it comes time for you to sell instead of buy. You'll be pointing at the neighbor's a couple of houses down to prospective buyers, saying things like, "Theirs is on the market for $35,000 more than mine, and it's the same house."

So let me get this right. You're suggesting that real life market conditions of items take a back seat to the theoretical values set forth by some political or industry group? Wow. Tell you what. I'll buy a bunch of MSFT shares right now for $20 and sell them to you for $25. Why? Because Jim Cramer said they're worth more than $20 and he's a trustworthy person.

HCAD is all about tax revenue. So you bet I'll challenge anything they say regardless of whether I'm buying or selling. My decision to buy my new home had nothing to do with what HCAD said about it other than I needed their number as an estimate of how much I need to escrow each month.

[TJones]

So let me get this right. You're suggesting that real life market conditions of items take a back seat to the theoretical values set forth by some political or industry group? Wow. Tell you what. I'll buy a bunch of MSFT shares right now for $20 and sell them to you for $25. Why? Because Jim Cramer said they're worth more than $20 and he's a trustworthy person.

HCAD is all about tax revenue. So you bet I'll challenge anything they say regardless of whether I'm buying or selling. My decision to buy my new home had nothing to do with what HCAD said about it other than I needed their number as an estimate of how much I need to escrow each month.

No, I never suggested that to you. I simply stated that if I offered you $6k less than what KBB guide said it was worth , you would throw a hissy.

Using your logic, all those homes in River Oaks are just trumped up numbers by HCAD for the area ? It's a tough market for sellers of houses right now. I am sure that if someone offered you $1mil on a $2mil house as appraised by HCAD, you would take it, because that is only what the house is worth to that buyer, and you would never use the HCAD to justify your asking price, right ?

There is a line about how much the house is worth to you, how much it is worth to someone else, and what it's ACTUAL worth is. So if HCAD suddenly said a house you are interested in buying is worth $200k less than what it was worth last year, and you had an opportunity to buy it, at what price point would you use as a negotiating tool ? Assuming the owners and you were oblivious to what has happened on HCAD, because neither of you use it as a barometer and they were $150k above HCAD appraised value. You shake hands, draw up the papers and you think the house is worth the asking price to you. Then you decide to look at HCAD just to be sure, and BAM!, you are horrified by your near faux pas, are you still gonna buy it for their asking price, or would you decide to use HCAD as a bargaining tool ?

I am not saying that HCAD or KBB is the end all be all, I am simply saying that they are used as guides and tools to justify prices.

[jm1fd]

HCAD is all about tax revenue.

No. HCAD is all about following the law as best they can when it comes to valuing properties. That's it. They don't set the tax rates for the various jurisdictions. If the City of Houston ain't getting enough revenue then the City of Houston will raise their tax rates to get the revenue they want.

[RedScare]

Does the bank recognize the captured equity from the potential purchase? Therefore reducing the amount of the down payment. Or is 20% down based on the amount requested?

We don't have a HELOC currently. But I can see the benifit in that for improvements. Thanks for the replys.

The bank will order an appraisal. If the loan amount is less than 80% of the appraisal, you will not be required to carry PMI. Tanith's statement that the bank only goes off of the sale price is incorrect.

[TJones]

Banks base loans on what the value to risk factor is. So if you are getting a deal at $200k and the bank sees the property being worth $275k, making your $200k a good dela int heir eyes as well, then the risk for them is minimal, with your 10% down you being a creditworthy person such as you are gallagher.

I would go for it, at YOUR terms, and see what the bank wants to do, and hash it out. I have a good feeling they will say yes to you though using these factors.

Ability to prove 2 years of taxes

Having the 10% down in the bank going back at least 3 months, and that it isn't a recent deposit.

Your ability to prove your creditworthiness, i.e (740) beacon and you are over 25 yrs. old.

[jm1fd]

The bank will order an appraisal. If the loan amount is less than 80% of the appraisal, you will not be required to carry PMI. Tanith's statement that the bank only goes off of the sale price is incorrect.

When I bought my house the bank told me they were going to use the sale price, even though the appraisal was several thousand higher.

[tanith27]

The bank will order an appraisal. If the loan amount is less than 80% of the appraisal, you will not be required to carry PMI. Tanith's statement that the bank only goes off of the sale price is incorrect.

Different banks may have different rules. Yes the bank will order an appraisal prior to funding, but my experiences early on in life (before I was able to put down 20%) was that they would not reassess the value of a home based on an appraisal, and hence your obligation to pay PMI, for at least 2 years after the sale.

[tanith27]

I am not saying that HCAD or KBB is the end all be all, I am simply saying that they are used as guides and tools to justify prices.

Agreed! The point of this discussion revolved around me saying the value of an item ultimately comes from a number jointly agreed upon by a buyer and a seller, and not some outside publication. And I stick by that statement.

No, of course I would balk at a $6K reduction off KBB, but my statement holds true because I'm not a willing participant in that transaction. However, after research and trying other methods of selling my car, if I find out that $6K off KBB is indeed what the car is worth, then I will accept that that now becomes the value of said vehicle.

If a $300K HCAD appraised home is on the market for 6 months with no buyers, that tells me the home is not worth that much in the current market even though HCAD says its worth 300. The sellers reduce the price to $250K and somebody then buys it. HCAD will adjust their values down to $250K because that is now what the home is valued at in todays market.

In fact, I just received a letter from HCAD on the home I just purchased and they're asking for all the details of the sale so they can accurately reflect this in their records. So at this point, HCAD will have a downward adjustment to make on their records as I purchased this home for less than what they have it appraised at.

[flipper]

Wow, this thread proves that people on the intertoobs will present their opinions as facts and continually back up their opinions with more opinions presented as fact.

flipper

[RedScare]

Wow, this thread proves that people on the intertoobs will present their opinions as facts and continually back up their opinions with more opinions presented as fact.

flipper

You got that right.

[cgallagher]

Banks base loans on what the value to risk factor is. So if you are getting a deal at $200k and the bank sees the property being worth $275k, making your $200k a good dela int heir eyes as well, then the risk for them is minimal, with your 10% down you being a creditworthy person such as you are gallagher.

I would go for it, at YOUR terms, and see what the bank wants to do, and hash it out. I have a good feeling they will say yes to you though using these factors.

Ability to prove 2 years of taxes

Having the 10% down in the bank going back at least 3 months, and that it isn't a recent deposit.

Your ability to prove your creditworthiness, i.e (740) beacon and you are over 25 yrs. old.

OK I guess that is what I was waiting (wanting) to hear. It sounds like different banks will deal differently, but you're saying that my theory is reasonable based on actual value and I should run my proposal through the system.

For some reason, I thought flipper might get me 105% financing with nothing down and no payments for 90 days . But I guess this will do.