Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about real estate; specifically, what you should do if your new dream home turns into a hopeless money pit.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “Considering a Fixer-Upper? 15 Ways to Avoid a Money Pit” and “Why Many Owners and Renters Regret Their Home Decisions.” You can also go to the search at the top of this page, put in the words “real estate” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Today’s question comes from Bonnie:
“What should you do when your new home turns into a money pit?”
Money pits are everywhere
Last year, a family moved in down the block from me. Like me, they live on the water. And like me, they have a seawall. I heard that when these folks bought their house, they had the house inspected, but not the seawall. That’s a specialty inspection that costs extra.
So, guess what happened? A couple of months after moving in, their seawall collapsed and their dock and part of their backyard slid into the canal. The cost to fix was $200,000.
Even if you’re careful, this stuff can happen. But the idea is to be as careful as possible to minimize the odds.
If you’re already in the pit
If you buy a house, move in and then discover there are major problems, you don’t have a lot of choices.
Choice No. 1? Hire a lawyer and go after the sellers and/or the agent. If there were problems the seller or agent knew about and deliberately covered up, you may have a case, depending on the circumstances and the laws in your state.
But you’ll likely have to prove the agent or seller knew or should have known about the problem and failed to disclose it. In a few states, it’s “buyer beware” and you won’t have recourse at all.
The best way to assess your situation is to contact a consumer attorney. You can find one near you at the National Association of Consumer Advocates website, consumeradvocates.org. First appointments are often free.
Obviously, suing is expensive, and it’s a colossal pain. Which leads us to the best idea: not falling into a money pit in the first place.
How to avoid a money pit
Fixer-upper homes are a good way to build “sweat equity.” In fact, in some places home prices are so high, that’s all you may be able to afford. But whether you’re knowingly buying a fix-up or not, always recognize a home for what it is: A complex creature with lots of moving parts, all which cost a lot of money to fix or replace.
So here’s rule No. 1: The less experience you have, the more due diligence you do.
Rule No. 2: The older the house, the more due diligence you do.
Rule No. 3: The less money you have to throw away on surprise repairs, the more due diligence you do.
Starting to see a pattern here?
How to perform due diligence
First step to take? Get a Comprehensive Loss Underwriting Exchange report — known as a CLUE report — on the house you’re considering. This tells you about any insurance losses that have been claimed against it, including what was repaired and how much it cost.
Also, get in the habit of inspecting everything you see:
- Check out the foundation: Look for cracks.
- Inspect the roof: Look for water stains on the ceilings.
- Look for plumbing leaks under sinks. Use your nose: Are you smelling mold?
- Use a pencil and look for rot by pushing on trim around the windows.
The best way to remember everything is to get a home inspection checklist. You can find one with an online search.
Of course, you’re never going to buy a house — any house — without getting a thorough inspection from a qualified professional home inspector. So, why do your own inspection? Because professionals cost $300 and up. That means you can’t pay to inspect every house you look at. So, it never hurts to learn a few ropes and do your own inspections first.
And when you do order that professional inspection, be there. Go through the home with the inspector. You’ll learn a lot that will help you the next time you’re house-hunting.
Bonnie, I hope that answers your question. See you all next time!
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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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