Beware of buying home on a hill

Q: My friend wants to buy a house in a very upscale area of Washington, D.C. The asking price is $1.5 million. I advised her against buying the home because of significant repairs that need to be made.

For example, the house needs a new roof, an upgrade to the electrical system and repairs to the foundation of the home (where water leaks into the lower level), among other repairs.

These are bad enough, but there is a larger problem that threatens the very foundation of the home. The home is built on a hill that has a very steep slope in the rear of the home. During the last month or so the slope has suffered tremendous and significant erosion due to, I think, a lot of recent rain and water runoff. The area affected is about 20 feet by 40 feet and is approximately 30 to 40 feet from the rear foundation of the home. Some might describe this erosion as a "sink hole" if it were on a street.

Because of this erosion, I advised my friend against purchasing the property. The area is very hilly and difficult to get to with the type equipment needed to shore up with some kind supporting system. Because of the inaccessibility of the area, it will likely cost a lot more to fix the issue.

The seller has reduced the price by $100,000 to mitigate the situation. However, I wonder if the sale price was artificially set at the current price in order to give the seller the option to discount or negotiate with a prospective buyer.

What do you think my friend should do? Thank you for any advice that you may want to share.

A: The easy way to find out if the seller had arbitrarily raised the price is to have the buyer's agent prepare a comprehensive survey of homes that are similar that have sold in the past few months in the neighborhood. That will tell you if the house is fairly priced at $1.5 million or should actually be priced a lot lower.

But I agree with you that your friend should explore more fully the ramifications of the erosion and what, if anything, can be done to protect the property against further erosion. To that end, she may need to find either a landscape contractor with extensive experience in shoring up eroding land or perhaps a structural engineer who can tell her how the property can be shored up.

Whether the fix will cost $100,000 or $1 million, I don't know. But until your friend does know the answer to these and other questions, she would be foolish to make an offer on the property.

Q: I work for the United States Department of Agriculture in California. Your recent article on USDA home loans needs more clarification. The article spoke only of guaranteed loans, which are similar to VA loans. But the Rural Development [division] also has a 100 percent direct loan program that can be accessed at hundreds of local Rural Development offices.

This is a deep subsidy program with assisted rates as low as 1 percent. The maximum note today would be 5.375 percent, forever.

A: Thanks for the update. These are mortgage programs for people who do not live in major metropolitan areas. See the Web site for more details, or call your local USDA Rural Development office.

Q: In a townhouse community (where units are owned as condominiums), does a community pool automatically raise the sales price of individual units?

A: That's a great question, but there's no easy answer. That's because adding a significant community improvement like a pool, work-out facility, or other freestanding structure has significant upfront and then ongoing costs that will add something to everyone's monthly maintenance fee.

If the condo association takes on debt to pay for a $150,000 to $200,000 pool with beautiful landscaping surrounding it, outdoor furniture and a restroom, paying off that debt can involve instituting a special assessment or simply raising ongoing monthly maintenance costs.

While having an amenity like a pool might make the community more attractive to other buyers, and thus raise prices somewhat (or hold them steady in a falling market), some buyers will be unable to afford the special assessment or an increased assessment.

The question you have to ask is this: Will the benefits of building the pool more than offset the costs of installing and maintaining it down the line? If yours is the only community that doesn't have a pool, you probably have to build one just to compete. If yours will be the only community to have a beautiful pool, then it will likely raise the value of the property, even if it is only a little.

I hope this helps.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

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