Are you looking at prospective properties through rose-colored glasses? Functionally obsolete sounds like some sort of neurological problem. It can turn out to be a very dysfunctional financial problem. Properties can be dysfunctional if the layout of the house is odd, maybe you must walk through a bedroom to get to the bathroom. The house may have two front doors, 2 kitchens, or perhaps you must walk through a bedroom to get to the next bedroom. Maybe it’s the largest house in the neighborhood or the only 2 bedroom in a 3 to 4 bedroom neighborhood. What if it is a log cabin located in an all brick area of downtown, a shared driveway, or the last home standing in a commercially zoned area.
Depending on how long you have been in the Real Estate business, you have most likely seen one of these dysfunctions. These types of properties can be very alluring because the seller is usually trying to unload it at a very low price. When is it worth it? Some of these items can be fixed. We had a client buy a house with two front doors. One of the doors opened to a den and bathroom, the other opened to a living room. It also had a bathroom that was added in an area that was an extremely tight squeeze to be able to enter it. As a rental property, this home can be repaired to be very livable. One front door can be removed; the bathroom can be enlarged a little bit. It will still be a tight squeeze and the flow of the house will never be attractive enough for a long-term homeowner. If the client wants to remodel it and the numbers work financially, it is terrific for the seller and buyer. As a mortgage broker, I would have concerns as to whether the client’s refinance will be successful. The lender will likely cut the appraisal value due to the strange layout. The lenders main concern whenever they are lending on a property is “How long will it take to market this property should we have to foreclose on it”? If a property is still used as a private home, yet zoned commercial, Lenders tend to turn this property down because they don’t want to do commercial loans and they, again, are afraid of marketability, should they have to foreclose.
A fellow investor recently purchased a home with two kitchens. He had it on the market for a short while and noticed everyone looking at it was shocked when they walked into the second kitchen. He took advantage of the situation and began marketing it as a home with a mother in law suite and sold it immediately. He did sell it a tad below the market value but the buyers were thrilled, the Lender was comfortable with the loan to value and he still made a great profit.
Some dysfunctions can be repaired or turned into an advantage. Some need to be someone else’s headache. If you are considering a property that may have an issue, talk with other experienced investors, your mortgage broker, or a third party real estate agent about the future marketability. If you have a house that you are unsure about, I will be happy to give you direction. This is an area that you could stand to lose a lot of money.