My husband and I are in the process of “buying” a home for $0. Not kidding.
I’ll admit our circumstances are so strange that seasoned mortgage loan officers scratch their heads. People just don’t get homes for nothing.
But I’ve learned it is possible in many areas of the country. Read on to find out how.
Let me be up-front: My husband and I are Christians, and our faith is a big part of the reason we’re buying a home for next to nothing. This does not mean that you need to share our faith to put the information we’ve gleaned to work for you. But our faith is a big part of our personal homebuying story.
I’m writing this article in my daughter’s half-painted bedroom, which is functioning as our living room. The windows are untrimmed, and I have a space heater pointed directly at my feet. Today was the first hard frost in the heart of Hoosier land, and we don’t have a functional furnace in our home.
If you’d told me a year ago that today I’d be working from a home of our own, instead of our one-bedroom apartment, I’d have told you that you were nuts. We were nowhere near ready to buy a home.
If you’d told me that the home I’d be living in by October 2013 wouldn’t have a functional kitchen, finished drywall, or a furnace, I probably would have run in the other direction.
But, here we are.
How did we get here?
Long story short, in June, my husband Ben and I jumped headfirst into a ministry called The Moria Project. The Moria Project is an intentional Christian community planted in a half-abandoned block on the Near East Side of Indianapolis.
A Strange Situation
When we decided to move, we thought we’d be getting our house, a duplex with one liveable (and rented) half, and one half in need of major repairs, for about $30,000. Then the ministry’s Board of Directors gave us exciting news: They’d sell us the house for whatever they owed on it.
Which turned out to be $0.
But the house still needed several thousand dollars worth of work to make it livable. At first, we thought we would just “buy” the house for nothing with a quit-claim deed and a $250 title search (just to be safe). Then, we could turn around and take out a Home Equity Line of Credit against the value of the house.
Then we found out that most lenders set the value of a home at whatever its purchase or refinance price is for a calendar year. (I assume this is to prevent people from doing too much refinancing.) This meant that if we got a quit-claim deed to our home, it would be worth nothing for a full year in the eyes of the lenders.
So we needed a more traditional mortgage that would let us “buy” the house while giving us fixer-upper funds.
But we didn’t have time for the mortgage process. With our apartment lease up at the end of August, we needed to get the house livable ASAP. So we started working with a local non-profit lending organization, while spending 50+ hours a week and every dime we could find on renovating the house.
In a month, we had tapped out our cash reserves to redo our half of the home’s plumbing and electrical, put in a bathroom floor, install a shower, put up sheets and sheets of drywall, and replace the majority of our windows. When our lease was up, we moved in.
The house still needed a kitchen, finished drywall in two of three downstairs rooms, a bathtub, and hot water for the bathroom sink.
Getting the Mortgage
Right now, this house that we’ve spent so much money and so many hours on still isn’t technically ours. Luckily, it’s owned by people we know well and trust very much. (I would not recommend getting yourself into a situation like ours unless the home seller meets those requirements.)
We’re nearly there on getting a fixer-upper mortgage. This will let us officially buy the house and give us money for further projects, starting with a furnace.
For the mortgage process, we’ve worked with the Indianapolis Neighborhood Housing Partnership. INHP, a non-profit, focuses on helping lower-income families brush up their credit, learn to budget, and buy a home.
And luckily for us, they have a great loan product that offers extra fixer-upper funds for everything from a major kitchen overhaul to painting the walls.
Loans like this, which we’ll talk about in more depth in a future article, are based on the assumed future value of the home once the proposed renovations are complete. In our case, our home would probably be worth $20,000 or less in its current condition. It still needs a lot of work. But we’ll be able to get a loan for $30,000-$40,000 because, once we finish remodeling, our home will be worth at least that.
So, we’ll end up with a $250-$350 mortgage payment, including insurance and property taxes, for the entire duplex. Our renter pays $300 a month, so we are, effectively, buying a home for nothing.
As a family, we’ve learned quite a bit. We’ve learned that we can do dishes in a bathroom sink that only runs cold water; and that we really don’t need much, as long as we’ve got each other. (And functional Internet.)
But, seriously, we’ve learned quite a bit about the types of homebuying programs, community development corporations, and loans that are out there. And now that you’ve read our twisted homebuying story (and this is the short version), read on to find out how you might put some of these homebuying options to work for you.
Practical Ways You Can Buy a Home for Nothing
Disclaimer: My family hasn’t used all of these options in buying our home. But we’ve either used these techniques, or know people who have.
Look Into Distressed Neighborhoods
Moving into a distressed neighborhood was an essential part of The Moria Project. The fact that we’re surrounded by abandoned houses and a handful of questionable neighbors means that we can get these homes cheaply enough to plant our community. We can’t afford to do this sort of thing in the ‘burbs.
But what is an essential for us could merely be a good way for you to save money on a house.
Fifty years ago, our ZIP code, 46201, was among the most desirable in the United States. These gorgeous, 100-year-old, hardwood-framed houses weren’t cheap then. But they are now. And much of that price has less to do with the houses and more to do with the six or seven abandoned properties on our block.
In neighborhoods like this, you can pick up even recently renovated homes for $50,000 or less.
So if you want to buy a cheap home for your family, or as a rental property, look into neighborhoods like ours.
The definition of “distressed neighborhood” varies widely from city to city. We are not in the worst part of Indianapolis, not by a long shot. Our neighborhood isn’t known for drug deals on the corner (though I’m sure that happens from time to time) or gang violence.
Instead, it’s distressed because of high rates of home abandonment and the general grind of widespread poverty. Our neighbors are mostly kind people who have lived on this block for decades, and I feel safe enough to walk our daughter to her daycare a few blocks away each day.
Living in a neighborhood like this is largely about common sense. We don’t flash our relative wealth in front of our neighbors, and we lock our doors pretty much all the time. There are certain areas where I don’t walk unaccompanied, and we don’t leave valuable items outside overnight.
And our family and the families moving in near us all have the means to shield our lives from some of the dangers of distressed neighborhoods: poor public schools, the unavailability of healthy food, break-ins, etc.
Most of us will either homeschool or send our children to private or charter schools. We have cars that can transport us to the nearest supermarket, and we can all afford basic security systems to deter break-ins.
Look for Promising Neighborhoods
Unless you have a specific call to do so, I’m not going to suggest you move your family to an area known for gang violence and generally scary living conditions. But that doesn’t mean you should rule out the idea of living in a distressed neighborhood.
Many cities are working to rehabilitate neighborhoods like ours. As Americans, especially young ones, become jaded by suburbia’s veneer of perfection, more people are moving back to the inner city.
In fact, a recent Time article noted that in 2011, the United States’ urban population grew faster than its suburban population for the first time in almost a century. As this phenomenon continues to grow, urban areas like ours will, we hope, become the beautiful neighborhoods they once were.
In our case, we have a hope-inspiring example of that just down our street. One block south of us is a different world, a world of beautifully maintained homes with picket fences in the front yard.
These homes are populated largely by middle-income families who have been in the area for years. Many of these families moved into the neighborhood 20 or 30 years ago to join Englewood Christian Church (a mega church before there were mega churches) in its effort to revitalize Indy’s Near East Side.
So if you want an excellent way to save on a home, look in places you wouldn’t expect to find a place to call home. Move toward the city, rather than away from it. Check out poor neighborhoods on the upswing. You might be surprised by not only the home prices, but also the personality of neighborhoods like these.
Check Out Foreclosures
In a roundabout way, we’re buying a foreclosure home. (I told you I gave you the short version of the story.)
Luckily, you don’t have to jump through all the hoops we have in order to buy a foreclosure. The key here is to work with a real estate agent who knows about the foreclosure process, including how to find the best foreclosures in the area.
One thing to note about foreclosures, which I have experienced, is that they often require a certain amount of fixing up. Many foreclosures have been sitting for months or even years before being purchased. This alone creates problems because basic maintenance wasn’t done.
And who knows how long the former, financially distressed homeowners didn’t take care of basic maintenance before that.
When you buy a foreclosure, you can often get an excellent deal, but you may not be able to get traditional financing. So talk with a real estate agent and/or mortgage lender about your options.
Another thing to keep in mind is that foreclosures don’t always come with title insurance and warranties during closing, as they would with a traditional home purchase. For our home, we don’t have title insurance, but we did pay for a title search before we agreed to buy the home.
I would highly recommend that you do the same, it’s a couple hundred bucks well spent.
According to Kiplinger, there are three ways to buy a foreclosure property. One is to negotiate with the homeowners before they go through the foreclosure. This is risky, and many of these deals fall through. But this is typically the best way to negotiate a super-low price.
The most common option is to buy a foreclosed home at auction, which can save you up to (usually) about 25 percent of the home’s would-be purchase price. During an auction, you can’t see the inside of the home, so this option comes with risks, as well.
Finally, you can have your real estate agent negotiate with the bank about a home that has gone through auction without being sold. Unfortunately, you’ll typically save less this way, as the bank wants to sell the home for close to market value in order to recoup its losses.
But if the house has been through auction and sat on the market for several months, a good agent should be able to negotiate a great price for you.
Buy from a Local Land Bank
Ben and I did not buy our home from a land bank, but many of our neighbors and fellow community members have. Plus, the ministry we’re a part of has bought an empty lot from the Indianapolis Land Bank, and we’re in the process of purchasing two more abandoned properties from the Land Bank.
Land banks aren’t everywhere yet, but their popularity is growing. As more cities deal with high rates of foreclosure and home abandonment, they’re turning to the land bank idea to clean up abandoned homes and properties, while encouraging homeownership, which, in turn, increases tax revenue.
Land banks are typically run by a local or county government. Each land bank operates slightly differently, depending on its goals. Here in Indianapolis, non-profits and for-profit developers can buy a home through the land bank for a couple thousand dollars – the cost of “scrubbing” the title.
Because land banks are often operated to provide affordable housing, boost homeownership and reduce the number of abandoned properties, purchases through a land bank tend to be fairly restricted. In most cities with land banks, these super-cheap properties go to non-profit and for-profit developers who can present a coherent plan for creating affordable housing in the area from land-banked properties.
But, like I said, each land bank has its own rules. Let’s look at some of the more well-known land banks in the U.S., and you’ll see what I mean:
Indianapolis Land Bank
The Indy Land Bank has shut down as of this writing because of some indications that land bank officials passed property to favored buyers and took a cut of the profits. Hopefully, this land bank will be working again soon.
The Indianapolis Land Bank acquires and holds tax-delinquent and abandoned properties and then sells them to developers and individuals who will help develop communities into more livable spaces.
In Indy, land bank buyers have to complete an application and bidding process, letting the Land Bank know what they plan to do with the property in question. There’s a limit to the number of land-banked properties each entity can buy within a calendar year, and there’s no set requirement for what must happen to the properties after they’re acquired from the land bank.
Genessee County Land Bank
This land bank in Michigan was one of the first in the country, and it allows individuals and non-profit/for-profit entities to purchase land-banked properties. Like Indianapolis, Genessee County has an application process. Both individual buyers and developers have to fill out an application and be approved before purchasing a land-banked property.
The Genessee County Land Bank’s website lists all the properties available through the land bank. Some properties need major renovations, while others, often foreclosed on because of tax liens, are in fairly good shape. Sale prices vary, with some homes costing next to nothing and others are close to market value.
Dallas Land Bank
The Dallas Land Bank in Texas focuses mainly on non-profit organizations and empty lots. Its goal is to get empty lots into the hands of non-profits, who then develop the lots into affordable housing. Sometimes, the Dallas Land Bank has houses available, as well.
This land bank sells lots for about $4,500. Developers have to complete a detailed proposal about the use of the property, and the proposal has to be accepted by the board and city council before lots can be purchased.
Cuyahoga County Land Bank
The Cuyahoga County Land Bank focuses on getting properties into the hands of owner-occupants. Home prices start out as little as $4,000, and the land bank runs a fixer-upper loan program that then gives buyers the funds they need to complete repairs on the home.
Owner-occupants in Cuyahoga County, Ohio, basically have dibs on the land bank’s properties. They have 30 days to purchase homes in need of moderate work before developers can bid on the properties. Owner-occupants have to agree to complete essential renovations and to live in the home for at least three years to qualify for this program.
As you can see, land banks run in widely different ways. If you’re in Ohio, purchasing a property straight from the Cuyahoga County Land Bank is an excellent way to save a fortune on your home. But if your area’s land bank sells primarily to developers, you may have better luck with the developers, both for-profit and non-profit, who turn land-banked properties into affordable homes.
Talk to a Community Development Corporation
Community Development Corporations have been around since the 1960s, and have become increasingly popular. According to Community Wealth, in 2006, there were more than 4,600 CDCs that had developed more than 86,000 housing units and 8.75 million square feet of industrial space per year.
CDCs are unique because they’re anchored in individual communities and are often run by community members. While CDCs generally focus on lower-income areas, many larger CDCs expand through multiple counties or even states.
Community Development Corporations participate in a wide variety of activities, but their main goal is to create affordable housing opportunities. Some CDCs build or recover apartment buildings, offering affordable, safe rental housing. Others buy abandoned properties, tracts of land, or fixer-upper homes and renovate or build homes that are then resold for at or near cost to local residents.
Many CDCs work closely with local land banks to develop abandoned properties and empty lots available through the land banks.
We’ve had plenty of experience with our nearest CDC in our homebuying process because our home is still technically owned by the corporation, the Englewood Community Development Corporation on Indy’s Near East Side.
The Englewood CDC buys East Side properties through the Land Bank to renovate, but it also has a heavy focus in affordable rental properties, especially for those who may otherwise be unable to rent, such as special needs renters and individuals with a criminal record.
CDCs of All Different Types
During our homebuying process, we looked at homes from several Indy-area CDCs. Each Community Development Corporation had a slightly different feel and mission.
Several months ago, we looked at CDC-renovated and rebuilt homes on Indy’s Near North Side. This CDC bought severely damaged homes and empty lots in one particular north side neighborhood. They renovated the homes and resold them to local homebuyers for about $50,000 each.
Another CDC that we looked at on the south side of Indianapolis focused on newly built homes. Because of a large grant, this planned subdivision was able to offer homes worth $125,000 for $70,000 or less. Residents would get a mortgage for $45,000 to $70,000, depending on their qualifications.
The rest of the money was paid to the home contractors through the grant. So long as the homebuyers lived in the home for at least three years, the second, grant-based mortgage was forgiven.
Buying through a CDC
Buying a home through a CDC is a little like buying one through a land bank. It depends on the particular organization and its rules. Because CDCs have a heavy focus on affordable housing, most sell or rent exclusively to owner-occupants.
Also, some CDCs, at least the ones we looked at, have fairly strict income qualifications. If you’d easily be able to qualify for a traditional mortgage on a property being sold at market value, you may be unable to buy through a CDC. However, if your family doesn’t have a lot of extra money, working with a CDC may be just the solution for you.
Some CDCs include a financing component, so you can get your financing through the CDC. Others work with national and local lenders to help individuals get financing in a more traditional manner. Many CDCs, because they work with lower-income families and individuals, also offer credit counseling and can help you prepare financially for taking out a mortgage.
To find a CDC in your area, Google your state, county or city + community development corporation. Many CDCs have helpful websites that will let you know what services and types of housing they offer, or you could contact the CDC directly to talk about your options.
Purchase a Fixer Upper
Purchasing a fixer upper can be frustrating, and I speak from experience. But that doesn’t mean it’s not something you should consider, especially if you want an affordable house and don’t mind a little DIY work.
There are many different ways to purchase and finance a fixer-upper, and there are many different ways to go through the fixing-up process. Here’s an overview of a few of the more common financing options:
Get a Mortgage and Pay Cash
If the home you’re looking to purchase isn’t in need of major repairs but just needs some updates, this can be a good option.
Say the house is on the market for $100,000, which is less than other homes in the area because it needs updated appliances and such. With this strategy, you’d get a regular mortgage for $100,000 and complete the upgrades as you have cash. You could also pay for repairs with non-mortgage credit, like a credit card.
This option typically only works if the house doesn’t need huge overhauls. Banks don’t typically finance homes that are falling apart because such a home would be a bad investment. Because you may be unable to get traditional financing for a major fixer-upper, this option won’t save you a hefty sum.
But you could still buy a home for less-than market value and, with some wise choices and shopping around, get more than your money’s worth once the home is updated.
Opt for a Fixer Upper Loan
Traditional mortgages are based on the current appraised value of the home. So if an appraisal sets the home’s market value at $100,000, the bank won’t loan you $110,000. In fact, they probably won’t loan you more than $80,000 to $97,000, depending on how much of a down payment the lender expects.
But with a fixer-upper loan, the lender will give you more than the house’s current market value. The extra money comes to you in cash, or in checks written directly to your contractor, so that you have the money to complete repairs on the house.
The most well-known fixer-upper loan is the FHA 203(k) loan. It’s similar to the regular FHA loan, but it offers extra funds for fixing up the house. There’s a lot of red tape surrounding this loan, including multiple appraisals (one for the home’s as-is value and one for the estimated value after the proposed renovations are completed), and a complicated closing process.
The loan we’re using is similar to a 203(k) but is administered locally through a non-profit. It’s a little less complex and a little more flexible. The 203(k) is very restricted in what you can use the money for, but this loan allows more leeway and will let us finance things such as paint, a privacy fence and new appliances.
Renovate and Refinance
Thirty years ago, a couple I know took this tack with the fixer-upper they bought. This approach works well if you can cut renovation costs by doing most of the projects yourself.
With this process, you’ll buy the home at its current appraised value and work on it. Once you’ve completed the work, you’ll have the house re-appraised and do a cash-out refinance based on the home’s new market value. Then you spend the cash to do more renovations, re-appraise the house, and do another cash-out refinance.
The reason this somewhat complex process works well if you’re a DIYer is that you can stretch the cash-out funds further. For instance, you could spend $5,000 on a bathroom upgrade that will increase your home’s value by $10,000. But if you had to pay a contractor to do all the work for you, you might pay $9,000 for a renovation that would increase your home’s value by $10,000.
This process worked well for the couple in question, but it can be tedious and take lots of time. It took this couple five years to complete all the renovations on their home. So be sure you understand the limits of this process before you decide to go through with it.
Your Results May Vary
All of these options are excellent ones for buying a home for less than market value, even for next to nothing in some cases. But whether these particular options will work for you depends on your situation.
I can speak from personal experience that buying a home in a non-conventional way can be a little harrowing. Aspects of our homebuying process have confused experienced mortgage loan officers!
So if you do decide to take one or more of these options for buying a home of your own, whether as your primary residence or as an income property, be prepared to do your own research and be your own advocate.Topics: Mortgages