Home ownership is a big part of most people’s dreams for the future, but with home prices are still going up and higher interest rates making mortgages unaffordable, it can seem like an impossible one—even when you look at the cheapest areas to buy.
So it’s not too surprising that people sometimes stumble on an incredibly cheap house and get pretty excited about it—even if the property is in need of serious repair. If you take a gander at Cheap Old Houses, you can find homes for as little as $13,000, and cities around the country have programs that allow you to buy a house for almost nothing; both Newark, New Jersey’s Homeownership Revitalization Program and the U.S. Department of Housing and Urban Development (HUD) have $1 home programs, which is just what it sounds like. Even if you’re wary of buying into a government program, there are plenty of ramshackle old houses out there, like this one in Jefferson, Mississippi, listed at $10,000.
The play is obvious: You scrape together the minimal down payment, buy the cheapest house in the world, and make it livable via sweat equity. There’s only one problem: It’s usually a terrible idea.
Cheap houses often come with strings attached
If you’re looking at all those $1 homes and imagining just moving in and doing some patchwork repairs to make it safe, think again. Almost all of these programs come with a lot of strings attached, including:
- Renovations required. Government-run $1 home programs always legally require you to renovate and repair the property. That’s pretty much the whole point from the government’s point of view—to transform rotting old houses that generate zero tax income into viable real estate. You’ll need to review the requirements carefully to be sure you know precisely what’s required.
- Financing. Even though you’re buying the house for $1, you usually have to prove that you can afford to make the necessary repairs by demonstrating financing.
- Residency. Many of the $1 home programs are restricted to people who have lived in the area for a time, because they’re designed to expand home ownership for locals. And many of these programs require you to commit to staying in the home for a period of time (Newark’s program requires you to live there for at least 10 years, for example).
- Non-guaranteed price. Most $1 home programs don’t actually guarantee you a $1 home. The pricing of the properties is flexible, and some people will qualify for a $1 purchase price—but you might not.
The bottom line is, buying one of these houses makes you legally responsible for repairing it, which could cost a lot of money and have a lot of negative effects on your life if you can’t make it work. Even if you review all of that and think it’ll be worth it (and that you can meet all the requirements), or you’ve found a super cheap house that isn’t part of one of these programs, there are still many reasons to think twice.
Super cheap homes are hand to finance
It’s one thing if you’re buying a super-cheap house for cash. If you’re planning to finance it to any degree, however, you’re going to face challenges. Simply put, most lenders are reluctant to write home loans for less than $150,000—and finding one that will consider a loan for much less than that is almost impossible. If you’re planning to finance the purchase of a house for less than $100,000, it’s going to be a real challenge.
There are fixed costs to consider
The other aspect of a super cheap home purchase is the carrying costs:
- Property taxes. The amount of property tax you’ll pay depends on where you live; the average for the entire country is a little over 1% (the median payment is close to $3,000 annually), but if you’re lucky enough to live in New Jersey, you’ll pay a whopping 2.46%, which translates to a median payment of $8,928. The key thing to keep in mind is that you’ll be taxed on the home’s assessed value, not its purchase price. Just because you bought it for $10,000 doesn’t mean your property taxes will be based on that value—they will certainly be much higher.
- Insurance. The average annual cost for homeowner’s insurance is about $1,428. If you live in a flood zone or an area prone to other natural disasters, your insurance costs may be a lot higher.
- Materials costs. Even if you assume you’re going to DIY the work to transform your cheap old ruin into a dream home, you’re going to have to buy all the materials—and with an old house that hasn’t been repaired in a very long time, that’s going to add up fast.
- Unforeseen repairs. You know that buying a house for less money than a used car is going to come with problems, and many of them will be disclosed, probably in the listing. But if the home hasn’t been maintained (or occupied) in some time, there could be all kinds of hidden damage, from foundation cracks to the presence of toxic materials, that will cost lots of extra money to deal with—and you won’t know about them until you actually own the house and begin working on it. Another problem is that homes that have been allowed to fall into ruin are often much more expensive to heat and have higher utility costs overall.
Finally, there are other potential downsides of buying an incredibly cheap old house that you need to consider:
- Quality of life. If your goal is to save money by moving in right away and fixing the place up as you go, not only will you be living in a home that probably lacks a lot of amenities and isn’t in the greatest shape (not to mention being a constant construction zone), your super cheap house is probably not in the greatest neighborhood. Living in a crime-ridden area, or on a block filled with more abandoned homes will not be a pleasant experience.
- Resale. Even if you successfully renovate and reclaim the home, if you decide to sell and move away at some point, you may not get your investment back if the rest of the area hasn’t improved too. You only bought the house because it was so cheap, after all—finding a buyer at a much higher price point might prove challenging no matter how great a renovation job you did.
As home prices continue to soar, the temptation to take a risk and buy a very inexpensive home to renovate soars too. Keep the many potential problems in mind before you make the leap.
Read More:Is Buying a $1 Home Worth It?