Sticky Situation Financing My Intended Personal Residence

2 Replies

Hello,

I am in a sticky situation with a property I own as my 'primary residence' and I'm somewhat unsure where to turn for advice as to how to proceed next. I thought this would be a good forum to gain some insight on the 'right' move. 

The situation is as follows:

I'm currently 25 years old. 

Last April, when I was 24, I purchased a piece of property in a quiet residential neighborhood in a  suburb north of Detroit, where I've lived just about all my life. It was one of the lowest priced offerings in the area, but still seemed like a good deal with lots of upside potential. 

They were asking 100K, I offered 101K with no inspection (I thought I knew what I was getting into plus there were lots of other offers and I really wanted the property). They accepted my offer.

738 sq ft house on the lot, with 576 sq ft detached two car garage as well. Lot is ~.85 acres. Nice and deep lot with the backyard facing the sunset.

I moved into the house wanting to make improvements while I lived there... well that plan didn't work. About two months later in June, we had a HOT and HUMID few weeks here in Michigan, and in the kitchen I started smelling a musty stench. I knew the cabinets were nasty and wanted to gut the kitchen anyway, so I went ahead. I took it down to the studs and floor joists, but the rot didn't stop there. The joists were shot in the kitchen, and the rim joist in the rear corner of the house was shot. No big deal, jack it up, slide a new one in, set her back down (small house). I decided before doing this now would be a good time to check the rim joists around the rest of the house.... I poked a screwdriver right through in most places. Completely shot just about all the way around the foundation. There was severe flooding in that area many years ago, before modern storm drains were implemented in the area.

Needless to say, I moved out and am living with parents now as they live nearby.

A few months later, to make a long story short, the house was taken completely down to the exterior sheathing and studs after I ripped all the siding off and gutted the inside walls. We did a DIY asbestos remediation of asbestos shingle siding underneath the aluminum siding that made the building look straight and square... got lucky and was able to dispose of it nearly for free at a Hazardous materials disposal event nearby. Lots of rot and now I don't regret gutting the house in preparation for DIY teardown. This saved me roughly $5K in abatement costs (we wore full body suits and respirators and were conscientious about keeping the dust down when boxing and bagging the material). 

Now the issue is... my property with a garage is likely NOT worth 101K, and I have 92K still left on the mortgage. It was never really worth 101K, but nobody (including the appraiser) knew that.

I want to build a two story house on the existing lot that is going to cost roughly 175K all in, conserving the detached garage. Plans are essentially complete (custom home) and ready for presentation to a lender. I do not have a contract with a builder yet but have contacts for all facets of construction (excavation, foundation, rough in, etc). 

I believe the new property will be worth at least 275K all said and done with a brand new custom 2 story home, based on comps. 

Where I run into trouble is with the current state of my mortgage. Should I contact the bank about my current situation, will they want to foreclose on me since I have 'detracted' from the value of the property? I have roughly $40K in my 401K, of which half I can withdraw for construction. I have $20K in the bank I can put down also. I have my income set up right now so that I am cash-flowing $2500/month (I bring home a little more than $4K per month). The bulk of my expenses are my current mortgage on the property, with that payment @ $930/month in total (conventional 15 year note, 3.5% interest rate).

I am thinking my best path is to go talk to banks (including the one I have a mortgage with) and try and get a construction to permanent loan that could pay off my existing mortgage and finance the construction, which would then be rolled into a mortgage once I'm done with the build.

If I walk away from this, I stand to lose 20-30K, maybe more depending if I sell the lot or let it go to foreclosure. I am seeking guidance on how to approach my own bank, and then if I need to approach other lenders, how to go about doing that. Excuse me if I sound a bit over my head here... I certainly am. I think I have a solid plan to recover the value of the property from a construction standpoint, but financially I'm not so sure.

I appreciate any help anyone can offer, thank you!

Originally posted by @Nicholas Hunsanger :

Hello,

I am in a sticky situation with a property I own as my 'primary residence' and I'm somewhat unsure where to turn for advice as to how to proceed next. I thought this would be a good forum to gain some insight on the 'right' move. 

The situation is as follows:

I'm currently 25 years old. 

Last April, when I was 24, I purchased a piece of property in a quiet residential neighborhood in a  suburb north of Detroit, where I've lived just about all my life. It was one of the lowest priced offerings in the area, but still seemed like a good deal with lots of upside potential. 

They were asking 100K, I offered 101K with no inspection (I thought I knew what I was getting into plus there were lots of other offers and I really wanted the property). They accepted my offer.

738 sq ft house on the lot, with 576 sq ft detached two car garage as well. Lot is ~.85 acres. Nice and deep lot with the backyard facing the sunset.

I moved into the house wanting to make improvements while I lived there... well that plan didn't work. About two months later in June, we had a HOT and HUMID few weeks here in Michigan, and in the kitchen I started smelling a musty stench. I knew the cabinets were nasty and wanted to gut the kitchen anyway, so I went ahead. I took it down to the studs and floor joists, but the rot didn't stop there. The joists were shot in the kitchen, and the rim joist in the rear corner of the house was shot. No big deal, jack it up, slide a new one in, set her back down (small house). I decided before doing this now would be a good time to check the rim joists around the rest of the house.... I poked a screwdriver right through in most places. Completely shot just about all the way around the foundation. There was severe flooding in that area many years ago, before modern storm drains were implemented in the area.

Needless to say, I moved out and am living with parents now as they live nearby.

A few months later, to make a long story short, the house was taken completely down to the exterior sheathing and studs after I ripped all the siding off and gutted the inside walls. We did a DIY asbestos remediation of asbestos shingle siding underneath the aluminum siding that made the building look straight and square... got lucky and was able to dispose of it nearly for free at a Hazardous materials disposal event nearby. Lots of rot and now I don't regret gutting the house in preparation for DIY teardown. This saved me roughly $5K in abatement costs (we wore full body suits and respirators and were conscientious about keeping the dust down when boxing and bagging the material). 

Now the issue is... my property with a garage is likely NOT worth 101K, and I have 92K still left on the mortgage. It was never really worth 101K, but nobody (including the appraiser) knew that.

I want to build a two story house on the existing lot that is going to cost roughly 175K all in, conserving the detached garage. Plans are essentially complete (custom home) and ready for presentation to a lender. I do not have a contract with a builder yet but have contacts for all facets of construction (excavation, foundation, rough in, etc). 

I believe the new property will be worth at least 275K all said and done with a brand new custom 2 story home, based on comps. 

Where I run into trouble is with the current state of my mortgage. Should I contact the bank about my current situation, will they want to foreclose on me since I have 'detracted' from the value of the property? I have roughly $40K in my 401K, of which half I can withdraw for construction. I have $20K in the bank I can put down also. I have my income set up right now so that I am cash-flowing $2500/month (I bring home a little more than $4K per month). The bulk of my expenses are my current mortgage on the property, with that payment @ $930/month in total (conventional 15 year note, 3.5% interest rate).

I am thinking my best path is to go talk to banks (including the one I have a mortgage with) and try and get a construction to permanent loan that could pay off my existing mortgage and finance the construction, which would then be rolled into a mortgage once I'm done with the build.

If I walk away from this, I stand to lose 20-30K, maybe more depending if I sell the lot or let it go to foreclosure. I am seeking guidance on how to approach my own bank, and then if I need to approach other lenders, how to go about doing that. Excuse me if I sound a bit over my head here... I certainly am. I think I have a solid plan to recover the value of the property from a construction standpoint, but financially I'm not so sure.

I appreciate any help anyone can offer, thank you!

I'd talk to a 203k lender. The numbers are tight on this one. It looks like you just did $100k price + $175k rebuild cost = $275k 'value,' so who knows where the ARV will really be. Hopefully, for you, the $275k figure is conservative and it's actually something north of $300k. You're going to be into it for ~$1k prepaid financing expenses to find a worthwhile yes/no answer.... appraisal fee + HUD consultant fee. No way around that unless your ARV number is WAY off.

Good luck.

Thanks for the advice, there's not many comps to go off in this area because it is mostly older homes being remodeled. There is some new construction but not much comparable. I think it could go up to 300K but maybe not much higher.

There is one other similar new construction house in the area which sold for 350K but had a full basement and attached garage, which my design does not have. It had a similar floor plan but crummier finishes/layout than I have spec'd out for this home too so it's really a crap shoot. My lot/location is far more desirable too.

Do you need to save part of the existing foundation to be approved for a 203K, because that may be off the table. The foundation is solid but only goes 24" below grade and therefore would no longer be permitted so I made the call to go with a brand new foundation over crawl.

So you're saying I need to shell out roughly $1K to get everything re-appraised and for solid financial advise whether its worth to proceed or not? 

Thank you again for taking time out of your day to respond. 

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