The Potential Pitfalls of Buying the Cheapest House Available
It’s June of 2021 and the housing market is on fire after months of rising demand. Up against a housing shortage and hiked up prices, hopeful homebuyers may be feeling the pressure to cut costs. Some may even be considering buying the cheapest house in their desired market. It’s not necessarily a bad idea if you have the time, interest and money to make renovations (because trust us, you will need to make renovations), but there are plenty of reasons buyers should put this idea to bed — before they run too far with it.
According to real estate experts, buying the cheapest house on the block usually brings on a mega case of “buyer beware.”
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“Typically, the cheapest house available is either in disrepair or has some problem with location or possibly zoning,” said D. Shane Whitteker, owner and chief broker at StateCollegeMortgages.com. “If the home is in disrepair, that will be obvious and you have options to secure a renovation mortgage, or if you have the money you can finance the renovations yourself. This is rare, but sometimes there is a zoning change that makes a property undesirable. A real estate agent should be able to help with this but you really should do your own research.”
What else could go wrong? Oh, quite a bit more. Here’s a look…
Last updated: June 4, 2021
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1. The Neighborhood Could Be Questionable
“More than likely if the home is not in disrepair you are dealing with some form of location obsolescence,” said Whitteker. “Maybe there is a gas station across the street or an industrial location close by. Maybe the dump or sewage plant is just down the street.”
Or maybe it’s something less draconian — like an issue with the school district.
“My sister, for example, just found out that her county is considering rezoning her school district to feed into a far inferior school,” said Brian Davis, a real estate investor and founder at SparkRental.com. “But if she sold the house today, many buyers would never dig deeply enough to discover this, and buy it based on the excellent current local school zoning.”
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2. You’ll Likely Need To Invest In Renovations
“Chances are that you will spend months or years working on the cheapest house available and spend much more than you ever imagined,” said Tomas Satas, founder, CEO at Windy City HomeBuyer Windy City HomeBuyer. “Considering that the cost of building materials and even labor is skyrocketing to astronomical levels, this is the wrong time to take on a huge renovation project. With the way prices for the materials are, you will end up paying double, triple than what you would have paid even a year ago.”
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3. The Price Tag Is Often Reflective Of Its Overall Value
“Often people misunderstand how real estate is valued,” said Corinne McCormack, a real estate agent. “They think the lowest price is the best price. However, the most important thing about real estate is what the property is worth. Value is determined by what the market will pay for a property. When something is the cheapest, you know that is what the market says it is worth. When you go to sell the property, you want to be assured that you will get your investment back with an increase in value. Usually, the lowest price indicates there are underlying issues with the location (near train tracks, foul-smelling business, etc.) so selling the property won't be easy.”
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4. You Could Have A Tough Time Selling And/Or Renting It Out
"It’s more than likely that you'll have trouble selling or renting it out,” said Alan Harder, a mortgage broker. “Properties that don't fall within the median price range are notoriously hard to find buyers or renters for.”
Glenn S. Phillips, CEO at Lake Homes Realty added that a cheap home may be priced that way because it was otherwise unsellable.
“If you buy such a home, when the time comes to sell you may be faced with the same problem,” said Phillips. “Once you consider the costs of transactions and costs of ownership, a cheap home may cost you more over time than a better home that you can more easily sell one day.”
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5. It Could Have Severe (And Invisible) Foundational Problems
“The buyer can inherit foundational issues and not even know it,” said Ryan David, lead investor, cash home buyer at We Buy Houses In Pennsylvania.com. “For example, a rotten joist in a far corner of the house causing the house to sag in an obscure area can easily be overlooked but create a major headache. When one part of the house begins to sag, it puts stress on the rest of the house, making it very likely that additional areas begin to sag. This leads to floors needing to be leveled, lolly columns needing to be installed in the basement, and replacing rotten joists. These remedies are not cheap fixes.”
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6. You Could Spend A Fortune On Replacements “
"The cheap house can be synonymous with the not taken care of very well house,” said Ron Leffler, a real estate broker. “You could be inheriting someone else’s problems they neglected to fix or opted for band-aids instead of replacement. Watch out for major system replacements that could be coming due sooner than you’d like especially roof, HVAC, pumps, sewer/septic, and chimney. Hire an experienced home inspector and or specialist and pay close attention."
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7. Hidden Deficiencies Could Hike Up Your Electric Bill
Something buyers may not know about by merely looking at a house is a hidden deficiency like poor insulation, Monika Zasada, real estate expert and home construction curator pointed out.
“For instance, lack of insulation will make your house teeth-shatteringly cold in the winter and sweat-drenched hot in the summer,” Zasada. “With extremely high cost of electricity, you will have to run heaters and air conditioners in the respective seasons. To mitigate that situation, you will be forced to open the walls (either in their entirety to install fiberglass insulation or partially for blown-in spray insulation). Inadequate framing and compromised electrical wiring are other examples of hidden deficiencies.”
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8. There Could Be Liens Attached
“Another pitfall is an inexpensive home could possibly have liens attached to the property,” said Ellen Schwartz, licensed associate real estate broker with Compass. “I was just working with a buyer on a home in Connecticut where the property was priced low, and my client was so excited about the price. The house needs a complete renovation and when I asked the listing agent why the price was so low he responded with: the buyers are responsible to settle all liens tied to the property, tax liens, etc. As well, they need to connect the sewer to the house. They would need to run a title search prior to submitting an offer. Title search could cost up to $1,000.”
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9. Some Problems May Be Beyond Your Control (And Wallet)
“All houses can support upgrades to a point, and that you can control, but you need to make sure of outstanding factors you can’t control [such as] neighborhood values, town limitations, tax increases if you increase the value, [and so on],” said Betsy Ronel, licensed real estate salesperson with Compass in Westchester, New York. “Are there land quality concerns? What is the history of this home? Due diligence by your broker and you is critical to find out why this house is priced much lower than the others.”
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10. It Almost Always Costs You More Than The Nice House
“Many times, buying the cheapest home on the market actually costs a buyer more money than buying a nicer one,” said Cyrus Vaghar, a real estate agent with the McAuliffe Vaghar Partnership at Coldwell Banker in Boston. “For example, let's say that the average price of a home in a particular neighborhood is $1M. To buy a $1M home in move-in condition, most buyers would need to put 20% down, or $200,000. If a fixer-upper comes on the market at $800,000 and needs $100,000 worth of work, it might seem like a no-brainer. However, to actually buy that home a buyer would need 20% of the purchase cost, or $180,000, plus the $100,000 for the work. Therefore, the total money needed up-front would be $260,000. Plus the buyer would have the headache of doing all the work and finding accommodations while it is done.”
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This article originally appeared on GOBankingRates.com: The Potential Pitfalls of Buying the Cheapest House Available