Would you buy this house? Earth Home

Question

Hello, I'm looking to purchase a earth home that is in bad shape. Basically, the owner wants out and his bottom price is $45k. The lot itself is 1 acre and the houses around the area are selling for $140-250k with smaller lots. The problem is this is a very unique house and needs a full gut, mold remediation and new roof etc. A carpenter bought this lot and built this house himself. In this area, you just can't find a house for $100k, let alone $45k. I've been going back and forth in my mind because it's a great deal, but such a unique house and needs new everything. Lots in the area are going for 50-100k, but there isn't much. Any thoughts would be appreciated. Thank you.

John Stevenson · Answer

My first thought is to find out what the land would be worth if it was vacant. Can you split it into smaller parcels? It may be a better idea to purchase the property and tear down the house and sell the land. Have you figured out how much the repairs will cost you? Also, you cannot compare an earth home to a standard frame house even if they are the same size. The market is different. Earth homes used to be popular in the 70's but they rarely build them these days and they can be a pain to resell. If you are looking to purchase this as a personal residence and you plan to do much of the work yourself and you like this type of home, then maybe it will work. If you are looking to rehab the property to resell, I would advise you to consider another property - that is unless you can sell the land as vacant.

James H. · Answer

I would find the value of the land and the cost for complete demo. Then I'd subtract whatever profit I wanted from the cost of the land minus the demo to determine my offer price. In that price range and that neighborhood (based on the pictures) I just don't see a big market of people with the money and wherewithall to handle a project like that. Most people that want cool houses like that don't wan't to live in a suburban type neighborhood which is what that appears to be. Most folks picture rural settings for earth houses. Maybe not all, but pic up a magazine with earth houses and 9.7 out of ten are on a mountainside or in the desert. So then, if you can't get the house deal to work out, maybe you could sell the package just for the land.

Greg P. · Answer

Hello, Here is a picture of the front : The Neighborhood: Thank you

Greg P. · Answer

Hi there, I will post pics soon. I'm working with a experience Bpo agent and Reo agent who says if I were to relist it as is, it would sell at $60k quickly. I do trust this realtor, but since this is a odd house, I'm still worried. I'm not planning on holding it although if a investor did buy it, he could probably put in $40k to rehab then sell on a contract for deed at $135-150k. I will be posting pics soon. Thank you guys.

John Stevenson · Answer

Bill Gulley makes a good point about conventional financing and appraisals. Appraisal standards state that if a home has 2 of the 4 walls below grade (i.e. up against earth) then it is not calculated as part of the Gross Living Area. In other words, Fannie Mae and Freddie Mac consider an earth home to be living in a finished basement with nothing above grade. This is a problem. To complete an appraisal acceptable to use for bank financing, the appraiser needs to find at least 2 comparable sales within the market area that also do not have any above grade area. This is very rare. Honestly, unless you plan to hold this property as a rental or live in it yourself, I would not buy this as an investment property - no matter how cheap the purchase price.

Bill Gulley · Answer

Greg P., just submitted and the mention failed, so here it is....

Bill Gulley · Answer

Greg, As John pointed out, you first need to identify the highest and best use of this property for profitability, is it a rehab flip, a rental, sell as is, or turn a sows ear into a silk purse....? I really like burm and underground homes, that doesn't mean I'd buy one as an investment (may as a buy-hold-rent)! Sounds to me like the house may have been improperly built, insulation, water proofing, drainage or other issues may exist if it is a mold factory. Burms or underground homes might not be able to be cured of mold buy interior work! If there are issues with a flat roof and it needs to be rebuilt, I suggest you don't rebuild as a flat roof! Use a Shed-roof and raise it if you can. If the bones are solid, will the market support a more expensive home, building up? Just a thought.... The biggest problem with these homes is that they are usually not common in an area. If you are talking to a Realtor who has never sold an underground or burm home, they may not be aware of the financing problems. These homes are not conventional and you need to get with someone familiar with these structures, imo. For a home to be financed in the secondary market it must be appraised under uniform guidelines. That means your comps need to be similar to the subject or if a comp is used that is not similar, the adjustment can not exceed the adjustment per centages (10%), when you have two that are not similar your total adjustments will usually be exceeded. That basically means that burm and underground homes are rarely financed in the secondary market.....I know, I did two of them and it was like pulling hen's teeth, as I recall the LTV was 70 or 75% too. So this will limit yoiur market to cash buyers or those obtaining portfolio bank financing usually at a low LTV, forget about selling to the average family with 10% down. To get rid of it, you may need to seller finance it long term. I hope you can post some pics of the subject so we can see what you have. What is the soil like where you are (what area) and was this a backfill with what? You might find that the place needs to be totally demo'ed and filled, what's the cost of that? It may be more valuable as a buildable lot. These homes have alot going for them, but they aren't for everyone. Skylights can usually brighten things up. But the security, lower fire risks, ability to survive weather (so long as it's not in a low lying area, LOL) and lower utility costs is a big plus! We had a builder of high burm and underground homes out here in the Ozark hills, the two I financed were in an area with comps. The biggest problem for him and that ultimetly put him out of business was the end financing. He had people standing in line to buy or have a custom home built, the idea was (is) popular, but these buyers seemed to be looking for lower preceived costs, which usually meant they really didn't have cash. While your price at 120K or so finished is pretty low anyway, those interested in that home probably won'y have 40K to plop down, IMO, 40K will get you into a much nicer conventional home. Again, post pics..... we can kick it around.... :)

John Stevenson · Answer

Whether you are getting a loan or buying with cash, it is not unreasonable to expect an appraisal. Especially if you are paying for it. If that is what it takes to make the deal happen, then I would think that the home owners shouldn't have a problem having an appraiser walk through the property. What did you mean when the BPO agent said it could sell for $60k? Is that with the residence or as vacant land? Because if it is with the residence then either they are not adding any value to the building or the land is below your estimate. Frankly it sounds like a real gamble. If you want to take the time to crunch the numbers, try to lock the owners into an agreement giving you a 15 or 30 due diligence period. Should give you enough time to count the costs.

Greg P. · Answer

Hi John, yes there is a lot less of a market for a buyer with this type of house around here. I would say the all in price including rehab would be $90k and I would be able to rent out for $1,100 which would be something that I would consider. The owners already think I'm buying it cash so I don't think I can get a appraisal because he won't be able to get in. I did have a bpo agent friend go there already and he said it would going to be a gamble to rehab and sell but to put it back on the MLS he thought it would sell at $60k due to the land prices there. Thanks for the advice John! I will let you know what happens.

John Stevenson · Answer

Okay, I start to understand the appeal here. Sounds like a really tight market. The problem is that when you try to flip a non-traditional houses, the risk factor increases dramatically. You like the property because of the low price, but will another buyer, who is looking for a place to live, like the property? Another option if you have trouble selling, is to consider holding the property and renting it out. Would there be a market for that and how would the cash flow work for you? Either way I would definitely get an appraisal on this one. Rather be safe than sorry. Let me know what you decide and how it works out.