Loan Q&A: Offer bank value of land alone?

Written By: Kathy Price-Robinson - Jun• 10•07

Dollars(Excerpt from Ask a Renovation Lender, with John Sway, Wells Fargo Mortgage)

QUESTION: We are looking to buy a house that is in foreclosure. The asking price is $550,000 and the house and guest house are in such a state of disrepair (mold, water damage, botched/unsafe remodeling, etc.) that we believe we’d have to tear them down and start over (while living in a tent in the front yard and stress-testing our marriage!). We would like to offer the bank the value of the land ($450,000 as of 2005 tax assessment), as we’d have the job of tearing down what stands on the lot. Are we crazy to think a bank would take a drastic underbid on the property? If not, any idea what the cost of demolishing a 1,500 sq ft house + 300 sq ft. guest house might be? — Anne and Erick Miller

ANSWER: Anne and Erick: Your offer does not appear to be unreasonable. What I would do in this situation is determine the value of the lot and then subtract the demolition costs. A contractor gave me an estimate of $15,000 to $20,000 for the demolition you described.

The good news is you will not need to sleep in a tent in the front yard if you purchase this house. Construction and renovation financing allow for mortgage payments to be financed during the construction period. In other words, most people live in what we call their departure residence during construction, and finance their mortgage payments on the new home during that time. Very few people can afford to make two mortgage payments every month.

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