Should you consider buying an unfinished house? It depends

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Published Date 9/19/2023

There are move-in ready homes, homes that require updating, and yet others that just require a bit of TLC after the purchase. But what about the half-baked varieties? But what about a house that’s partially built and on the market at a bargain price?

Realtor.com’s Lisa Marie Conklin says there are myriad reasons why the homeowner may have abandoned the project and listed it for sale — everything from running out of money to a divorce to a death in the family.

“If you stumble upon that listing, it might be tempting to think about completing the project yourself and turning it into your dream home (you can almost hear a few HGTV hosts cheering you on…)”, she says.

If the house is in a great location and has the makings of a great home as well, first determine just how unfinished it is. “If there’s no drywall, no toilet in the bathroom, and the kitchen lacks cabinets or appliances—think twice,” says Conklin. “The potential is there, but think about what it takes to make the home livable.” First determine the scope of the work, whether you’re planning a DIY or hiring contractors, and whether such an undertaking is financially feasible given the circumstances.

Next — look Into how far along they progressed. “A partly finished home means your potential abode might be riddled with permit headaches that don’t meet local building codes or a lack of permits altogether,” says Conklin. “So it’s critical to call the local building department to ask if permits were pulled for construction and if the home passed an inspection. Some municipalities might require a Freedom of Information Act request to get the info.” She goes on to say that the process can be time-consuming, so if you want to make an offer on a home quickly, be sure to include a contingency clause to the contract that permits you to receive, review, and approve the information from the FOIA request.

Of course, a thorough home inspection will help you determine if any permitted work was completed. “If the project was halted because of permits and failed inspections that were too costly to address, it might prove too expensive for you to tackle, even with a low sales price,” says Conklin.

The aesthetics and finish work (like kitchen lighting, cabinets, and statement hardware) are not nearly as important as things like HVAC, electrical, and plumbing. Set a structural budget first and then see what’s left for the design elements. Conklin also reminds you that aside from money, it’s essential to be realistic about the time needed to finish a large-scale project. “Materials are in short supply these days, and workers are in high demand. You might have to wait longer than you think to cross the threshold and settle in.”

Contrary to popular opinion, you can’t get a conventional mortgage to buy an unfinished house. Lenders like a sure thing — not something still in its larval state. However, there are home loans that cater to unfinished property scenarios — short-term specialty loans that typically have a higher interest rate but can be converted to long-term, traditional amortized mortgages. The most common types are renovation loans geared to modifying an existing structure, construction loans are for houses still under construction, and FHA 203(k) from the Federal Housing Administration, which offers two types of mortgage rehab loans. The Limited 203(k) is ideal for homes with minor repairs and renovations. The Standard 203(k) is designed for properties requiring more work, including structural changes. And lastly, bridge loans are suitable for buyers interested in an unfinished property while awaiting the sale of their current home.

Realtor, TBWS

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