Am I being ripped off on this house?

[jimmyrules712]

I'm about to purchase my first house and I found out some info today that worries me.

Here's the situation:
The house was built in 1960, so it's oldish. Originally it had like 1,600 sq ft and the current owners have done significant renovations to it in 2008 and 2009 which include a well done add-on that doubles the square footage to 3200, all bathrooms and the kitchen renovated (and look very top end), roof replaced in 2009, AC/furnace replaced, tankless water heater installed, all flooring in the house replaced (most of it was replaced with the new fake wood type of flooring), new vynal siding installed on exterior, all light fixtures, fans, etc. replaced with nice looking fancy ones, all windows replaced. As far as I can tell they did a lot of really nice things with the renovations. To give an example of the kind of changes they did to increase the home value, part of what was added on is a new master suite with a huge walk in closet and a bathroom bigger than my current bedroom. It's got the vanity with double sinks, whirlpool tub, and a walk in shower with 3 shower heads, etc.

The house has been on the market for about 9 months, originally listed at $230k, then relisted at $210k, then relisted at $200k. When I made my offer the house had just been relisted at $190k. I originally offered $180k plus they pay closing costs but they refused to go lower. We loved the house enough (and particularly the area where nothing else was for sale) that we settled for $189k plus seller pays 3% of home value to closing costs (equivalent to $5600). The bank appraiser appraised it at $200k but I don't know how trustworthy that is. I had it inspected and the only things that the inspector found were all very minor. The county assessor hasn't reassessed the house since it was purchased in 2004, so they still show the value being $74,000.

I'm assuming the current owners put at least $25k to $50k into the house, although I don't really have a way of knowing with any accuracy. What I just found out that concerns me is when they bought the house in 2004 they only paid $75k. I was assuming they probably paid in the range of $100k to $125k. So now I'm worried I may be way overpaying.

Now before any of you say I should have been able to do a lot better because of the real estate market crashing etc. let me say that this is in a small midwestern under 40,000 population where half the town works for the same company, and since it is an oil company virtually no jobs were lost during the recession so the housing market never crashed here. In fact the company's been on a hiring tear and there's a housing shortage.

Thoughts? Did I make a bad decision?

[snafu]

1st, did your offer to purchase include passing a house inspection by a professional? You need to see permits and inspection reports. Have you requested the municipal assessment?

The interesting factor in the housing market is that a house's value is based on perception...merely what a willing buyer will pay, the seller accepts and lender will fund. It's not priced by value of land + cost of materials + cost of labour + profit like a car. It could be compared to jewelry, what one person sees as value, the next person sees as extravagance. The mark-up is as high as 2,000% but the asking price can be negotiated.

[jimmyrules712]

1st, did your offer to purchase include passing a house inspection by a professional? You need to see permits ad inspection reports. Have you requested the municipal assessment?

The interesting factor in the housing market is that a house's value is merely what a willing buyer will pay, the seller accepts and lender will fund. It's not priced by value of land + cost of materials + cost of labour + profit like a car. I think of it like jewelry, what one person sees as value, the next person sees as extravagance. The mark-up is 2,000% and can be negotiated.

It did get inspected and the only things that turned up were very minor. The bank sent an appraiser and they valued it at $200k. I don't know how trustworthy that is though. The municipal assessment has not been updated since the home was purchased in 2004, it still shows the value being $74,000.

[frugalgirl]

Did you talk to the home inspector? If not, give him a call to ease your mind about the quality of the work done during the renovation and also get more information about what work was done. I would also check with your municipality and review the permits that were issued for the work that was done. This may give you more information on the extent of the renovation undertaken by the previous owners. It will also insure that everything was done under the watchful eye of inspectors and that no outstanding permit issues are out there.

If the owners did double the size of the house, they may have doubled its value. They may have purchased a small, outdated, undesirable house that was not selling. If it had less bedrooms and bathrooms, outdated bathrooms and kitchen, it was certainly worth a lot less than it is now. Just because you think that they only put $125k into it does not mean that isn't worth $200k.

[jimmyrules712]

Did you talk to the home inspector? If not, give him a call to ease your mind about the quality of the work done during the renovation and also get more information about what work was done. I would also check with your municipality and review the permits that were issued for the work that was done. This may give you more information on the extent of the renovation undertaken by the previous owners. It will also insure that everything was done under the watchful eye of inspectors and that no outstanding permit issues are out there.

If the owners did double the size of the house, they may have doubled its value. They may have purchased a small, outdated, undesirable house that was not selling. If it had less bedrooms and bathrooms, outdated bathrooms and kitchen, it was certainly worth a lot less than it is now. Just because you think that they only put $125k into it does not mean that isn't worth $200k.

I did talk to the inspector, he wasn't as talkative as I might have liked, but he didn't have anything bad to say about the house. When I asked him how the quality of the renovations seemed, etc. his response was something along the lines of "The only issues I found are in the report and they are all minor"

[MonkeyMama]

I don't see how what they paid for the home has anything to do with anything.

Is the price fair for the lot size, the square footage, the upgrades, and the quality of the home? Looking at other real estate in the area should give you a good idea of a fair price. Likewise, that is what an appraiser is for (though most appraisers I have come across will price the home anything the bank asks - massive mortgage fraud in my city - so you do have to take the appraisal with a grain of salt).

With so much information online, I think it's pretty easy to do a DIY type appraisal just to make sure you are not paying too much.

[jimmyrules712]

I don't see how what they paid for the home has anything to do with anything.

Is the price fair for the lot size, the square footage, the upgrades, and the quality of the home? Looking at other real estate in the area should give you a good idea of a fair price. Likewise, that is what an appraiser is for (though most appraisers I have come across will price the home anything the bank asks - massive mortgage fraud in my city - so you do have to take the appraisal with a grain of salt).

With so much information online, I think it's pretty easy to do a DIY type appraisal just to make sure you are not paying too much.

Well the town's small enough that there aren't a lot of older renovated homes for sale to give a good comparison. I can tell you that NEW houses in the 2,000 squ ft range are selling for anywhere between $150k and $200k depending on the location and quality of home, etc. Since this house is 3400 sq ft, but 50 years old, not sure how to compare

[bjl584]

If you have doubts, then simply don't sign the closing paperwork. It's not legally your house until you sign. You can back out of the closing if it worries you that much. You may lose any good faith money that you put down, but that's about all that can happen to you.

[shanecurran]

Have you looked at what other homes in the area have sold for?

[Ima saver]

My dh has been a licensed builder for 27 years. To replace a home of that size would cost over $300,000. I think you got a very good deal.

[maat55]

What are the comps in your area? Is this house oversized for the neighborhood? Just because someone builds on and spends money does not mean the house increases significantly in value. You may want to consider the assessed value for the home, it will likely be a little higher than the true value, but it may help you determine a ballpark for the value.

[Frugal]

Well, I was curious...did you really mean it was originally listed as 16,000 sq. ft., or did you mean perhaps 1,600? I have never heard of a house as large as 16,000.

[jimmyrules712]

To respond to the last few posts.

Like I said it's hard to do a comparison. All the homes in the same neighborhood are half the size and for the most part have not been updated since 1960. This house was practically gutted and renovated. The closest neighborhoods with new houses have the houses going for anywhere from $150,000 to $300,000 with sq footage ranging from 2,000 to 3,000. The only houses I've found that have anywhere close to my sq footage are brand new and thus not an apples to apples comparison. The only homes that are older are not as big and not renovated.

And yes I meant 1,600 sq ft

It's very true it may cost a lot to rebuild, the home insurance company estimated about $300k to rebuild also. But keep in mind this isn't a new house, it's 50 years old, so the rebuild cost should be a lot more than the sale value.

I love the house, I really do, I just am worried that when the day comes I need to sell I'll have a rude awakening. Keep in mind this is my first home so that's a big part of my discomfort, I'd probably feel this away about any house to some degree. It's definitely not a traditional starter home for first time buyers. But my fiance and I felt we wanted to buy something we could stay in forever if we never have a reason to change city's.

[snafu]

If the municipality has never updated the value of that house you may face a giant increase in property tax. Did you review all the permits signed off when renovations were completed? This has potential to be a big issue in the future.

If you and GF plan to live there for many years, today's value isn't as worrisome as it might have been. Understand that you are not buying the typical home in that community and therefore it will take longer to find a buyer sometime in the future.

[jpg7n16]

It did get inspected and the only things that turned up were very minor. The bank sent an appraiser and they valued it at $200k. I don't know how trustworthy that is though. The municipal assessment has not been updated since the home was purchased in 2004, it still shows the value being $74,000.

Get a 2nd independent appraisal. Nothing wrong with getting a 2nd opinion on a $200k purchase. If the values come back the same, then the home is legitimately worth that much, and $190k is a fair offer on that home in the current market.


Now is that how much you should be spending on a home is another story. Do you make over $65k/year?

If you only make $30-40k/year, you shouldn't get this home even if it is fairly priced.

If you make 80k+/year, then you can afford the home, and if the results of the 2nd appraisal confirm the bank's appraisal, you could move forward confidently since you love the house so much and have confirmed it's a fair offer.