Recently one of our clients ran into a dilemma while buying a HUD owned property that needed $10,000 worth of repairs. He was hesitant to do what's called a FHA203k rehab loan and pay an extra $65 per month. "What if I lose my job and have to take a lower paying job?" Plus his theory was he would pay an extra $800 per year, or $23,400 over the life of the loan for repairs. That is all certainly one way to look at it.
Or, you could look at it this way.. The likelihood of one staying in a house for the life of the loan is less than one thousandth of one percent or one out of every 100,000 people. So odds are he would never end up paying the $23,400. But for about the price of a cup of coffee per day he could be in this house soon with instant equity and start taking advantage of the tax savings that is likely to be more than $65 per month. He could find another house that is in top shape, but for the same amount of money he would get far less house, and likely with no equity for a few years. This is the risk/reward factor that comes along with buying distressed (bank owned) property. Typically you are going to have to spend some money out of pocket on these properties, but typically you still come out like a bandit in the end with equity in the property.
If you're facing this dilemma, have you looked at what your out of pocket investment and the instant equity equates to a year from now? 5 Year? 10 years? Verses a house with no equity for a few years?
Here's an example: Distressed property sales price $155,000 verses same house in top shape for $180,000. Add $10,000 worth of repairs. Distressed property price is now $165,000. All things considered, down payment and closing costs would be somewhat similar, you would have $15,000 equity in the property immediately! Let's say out of pocket expenses were similar for both homes $8000. You are $8000 dollars out of pocket with NO EQUITY in the house in top shape, verses $8000 out of pocket with $15,000 in equity in the distressed property! Even at a modest appreciation it would take you a few years to make it to the "break even" point with the house in top shape. Whereas the appreciation in the Distressed property continues to climb every year!
Here's the bottom line, the only thing certain in life is death and taxes. You should never overextend yourself no matter what. There is always that chance you could lose your job and not even be able to find another job. Should you just rent and pay someone else's mortgage? If you lose your job, certainly you could "find somewhere to live". But wait, you could do that if you owned as well!