Yahoo Finance I’m a Real Estate Agent: Here Are the Hidden Costs of a $1 Home
The City of Baltimore has relaunched a $1 homes program that it successfully used decades ago to sell and improve vacant homes.
“Four quarters that I was about to put in the parking meter — who wouldn’t rather buy a house with that? Well, not so fast,” cautioned Hoboken Realtor Michael Kotler.
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Once home to a million residents, Baltimore’s population has dropped to just 585,708. That leaves a glut of vacant homes to breed rats, blight and damage to neighboring homes.
It’s easy to see the appeal of buying a home for a dollar.
“With some smart, cost-effective renovations and general TLC, you could live ultra-affordably while fixing up the place exactly how you want it as your new home base,” said Rachel Stringer of Raleigh Realty. “Then you could potentially resell the home down the road for a tidy profit.”
But there’s no such thing as a free (or $1) lunch in life. So what are the downsides and strings attached to a program like this?
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Not-So-Prime Neighborhoods
Stringer explained why the neighborhoods these homes are in might be a miss for you: “Baltimore has plenty of charming, in-demand neighborhoods… but also areas where homes simply don’t appreciate in value as quickly.” Or at all, if the going rate is $1. “A cheap purchase price won’t matter much if the location makes it impossible to resell later for a nice gain.”
“For any real estate agent or homebuyer, the first three things we learn to prioritize are location, location, and location. This may give you an idea of how much the locality and surrounding areas can make or break a home sale,” said Hannah Jones, Realtor at NewBuildHomes.
“While the house may be cheap, an issue that could impact a buyer’s wallet heavily is the less-than-suitable location which decreases its resale value. Often the neighborhood is just not safe.”
As a former Baltimore real estate investor myself, who has owned over a dozen properties in these low-income neighborhoods, I can speak firsthand to the high crime rates.
Major Renovations Required
Homes that sell for $1 need more than “a little TLC.” They typically need a full gut renovation, with all new mechanical systems, a new roof and other structural repairs.
Real estate agent Dimitri Zubrich has seen it time and again.
“These buildings need expensive repairs, with structures alone often requiring $10,000-$50,000 in repairs. The additional cost related to installation of electrical, plumbing, and HVAC is reasonably estimated between $10,000 to $30,000 or more. More significant problems may be identified during inspections, that alone range from $300 to $500.”
Stringer expanded on that point: “Are vacant homes hiding structural issues, lead/asbestos, and other expensive problems? Unfortunately, it happens more often than you’d think. Factor in costs for extremely thorough inspections to avoid expensive headaches.”
Caution: Permits Ahead
All those structural and mechanical renovations require permits.
“Navigating the permit process for major renovations can be migraine-inducing,” Stringer said. “Expect delays, red tape and hefty fees eating into your budget and timeline.”
Each of those permits requires inspections from a city inspector. And when you wrap up every last renovation inspection, you then get to pull another Use and Occupancy permit — with another inspection and fee.
Strings Attached
Baltimore only sells houses for $1 to live-in homeowners and community land trusts. For-profit developers and real estate investors who don’t plan to live in the property can buy, but they pay $3,000.
To qualify for the $1 pricing, you must agree to live in the property yourself for at least five years. And you must pass the Use and Occupancy inspection within 12 months of buying.
High Taxes
Nojan Rahimi, director of Blutin Finance, pointed out one other oft-overlooked downside of buying through government housing programs like Baltimore’s.
“Once you’re the owner of a house, you have an asset in your name, which means you are liable to pay taxes. So, one way that could impact your wallet is if the tax rate in that particular area is high and so a bunch of your savings goes to the government every month.”
Baltimore charges a notoriously high property tax rate at $2.248 for every $100 in property value. It also charges income taxes (3.2%), on top of Maryland state income taxes.
It sounds great on paper. But the reality is that you’d probably only want to buy a $1 house in Baltimore if you already lived in a subject neighborhood and planned to continue living there long term.
Kotler offered a final word of warning for everyone else whose ears perked up at the low price point.
“Dollar homes may seem appealing at first, but keep in mind the significant renovation expenses, unanticipated maintenance, high property taxes, and other legal responsibilities that can make these properties far more expensive than they appear.”
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This article originally appeared on GOBankingRates.com: I’m a Real Estate Agent: Here Are the Hidden Costs of a $1 Home
