If You Incur Extensive Household Expenses
While you can put off some household repairs, others are critical. If the roof leaks, the sewer drain is clogged, the water isn't running, or you've lost electric power to some of your rooms, you need to get them repaired or replaced. These repairs, however, can be expensive!
The first thing you want to do is try to fix the problem temporarily, so that the repair doesn't blossom into something bigger. Can you, for example, stop the roof's leak by going up into the attic and putting plastic under some of the decking to stop water from coming in? Can you clean out the sewer line with a snake (available from any hardware store)? Have you called the water company to see whether the problem is on its side (that is, in the lines leading up to your water meter)?
Ultimately, however, you're going to have to make one of two choices: Sell the house with the problem or fix the problem. The next two sections discuss these two options.
Sell the House
One way to get out from under large, expensive repairs is to sell your house and move to a smaller one. The problem, of course, is that either you'll have trouble selling the house to any buyer or you'll have trouble selling it for very much money.
One way to avoid losing too much money is to price the house as though the repair did not have to be made (as if the roof were in great condition, for example), and advertise up front that you'll give back half (or two-thirds, or all) of the amount necessary to make the repair at closing. You won't actually have to come up with that cash out of your savings or other account.
Instead, that amount will be subtracted from your equity (the amount of your house that you have paid off) and given to the buyer as a lump sum. You'll get that much less money from selling your house, but you're likely to get more buyers than if you simply price the house lower in the first place. Why? Because many buyers can't afford to make large repairs — they're using all of their cash reserves for the down payment.
Don't ever (ever!) sell your house for less than you owe on the mortgage. If you do this, the lender will immediately demand full payment for the mortgage, and you may not have the money to pay up. Instead, make the repairs.
Here's an example. With a new roof, your house would be worth $90,000. You price it at $84,000 to account for the new roof the buyers will have to get. The buyers are putting 20 percent down and they'd planned on buying a house for $90,000, so they've saved $18,000 for this purpose.
If you price the house lower, they'll have to put down only $16,800, so they're able to keep $1,200 of their down-payment money. But $1,200 isn't enough to pay for the roof! Instead, you sell the house for $90,000 but give $6,000 back at closing. They put down their 20 percent ($18,000), but also walk away with a $6,000 check to pay for the roof. And you still get your $84,000 (minus whatever the balance is on your mortgage) and can look for a smaller house.
Many people don't realize that a Realtor's commission may be negotiable. Before signing with a selling agent (also called a listing agent), discuss the commission (usually 3 percent or 3.5 percent to each agent or 6 percent to 7 percent if one agent represents both the buyer and seller). See if your agent will drop down to 3 percent or 2.5 percent for each half of the sale.
If you're thinking of selling your house, keep in mind that many house sales do not require the use of a real estate agent. Because agents get 6 to 7 percent of the selling price of the house, if you don't hire one, you can afford to do a lot of advertising and pay for an attorney or Realtor to draw up the paperwork (which usually costs $500–$1,000), and still come out ahead.
Many people use real estate agents because they believe they'll get a higher price for their homes — after all, realtors get a higher commission if the house sells for more money. But even this may not be true. Most realtors would rather sell a house cheaply and quickly than price it high and wait for it to sell.
If they have to wait an extra three months — and do quite a bit more work showing and advertising the house — to sell it at a higher price, they actually lose money; they'd rather sell it three months earlier for less money.
Keep in mind, however, that if you act as your own agent, you'll have to put up a sign, take out ads in your local paper, and show the house yourself, and you won't have a realtor to turn to for advice along the way. Use your best judgment.
If you take some time to read up on how to sell your own house and think you're up to the task, go for it. If you don't think you'll be successful at selling your own home, shop around for a good realtor.
Pay for the Repair (But How?)
If you have money in your savings account, even if it was earmarked for something else, you probably want to use it to pay for your home repairs. Short of that, the most logical way to pay for overwhelming household repairs is to refinance your home and cash out some of the equity to pay for the repair.
Even if you don't have much equity in your house (to find your equity, subtract the amount owing on your mortgage from the amount your house is worth), some lenders will still give you cash back, financing your house for up to 120 percent of its value. This can help you pay for your home's repair, but can hurt you in two ways:
Your monthly payments may soar. (On the other hand, if interest rates are lower than when you bought you house, your monthly payments may stay the same.)
You may not have any equity in your house if you plan to sell it in a few years.
You never want to finance your home for more than you can sell it for. If your income changes, you might be trapped in your home, unable to sell it and unable to afford the payments.
