How to Find and Buy a Property Using Renovation Financing:
Realtor & Buyers Renovation Tool Kit
I speak with many Realtors who work with buyers. The buyers may have questions about crime statistics, roads, public transportation, local amenities, school system statistics, etc. Many buyers will ask to see properties based on these criteria and more. Buyers are often attracted to the best looking properties based on updates or the age of the property. The newer and “shinier” the better perhaps(?) but these properties may have a premium price attached to them for being brand new or just updated. They may not be located in the desired school district, etc. or the properties may be out of the buyer’s price range for whatever reason. I ask buyers to consider renovating an unappealing property to their exact taste as an alternative.
A Realtor I know once mentioned he showed a client some 50 houses. That’s a lot of gas money and car time for everyone. I asked the Realtor to explain the renovation loan option to the buyer as an alternative. In the end the client purchased a foreclosed home needing a new kitchen, new baths, new flooring, new lighting, etc. using an FHA 203K renovation loan. But the house was in the buyer’s preferred location and in the end, location was the deciding factor for the purchase. The buyer decided to create a custom home out of a trashed foreclosure house. Previously the buyer did not know such financing was even available to do that.
There are properties in most markets that are old, outdated, foreclosed, stripped of plumbing and so forth. Or there may be properties that are selling as estate sales where the longtime owners had not done updates in decades. As a renovation loan officer I teach Realtors and buyers how to buy these properties with one loan and include the costs of updates and repairs in the one loan. One loan with one payment is the result. Often additional “hidden equity” may be realized upon completion by the owner.
What I have done below is provide tools for buyers and Realtors to use when considering a purchase of a property with renovation financing, both at the start in locating such properties and finishing the process to a successful renovation that may even result in additional equity beyond the total cost.
Realtor & Buyers Renovation Tool Kit
- Buyers should be sure to have a loan pre-approval done from an experienced renovation loan officer to know the size of mortgage and purchase price that can be pre-approved with your specific circumstances as a first step.
- When searching for a property to purchase that would be suitable for a renovation, check the for-sale listing comments for these words and phrases below. Often these words are a signal the property is in need of remodeling. This can mean the property may be purchased at a discount over others in the area. Here are examples of phrases to search for in for-sale listings:
“Sold As Is”; “As Is Sale”; “Cash Only”; “Estate Sale”; “Estate Owned”; “Cozy”; “Mold”; “Opportunity Knocks”; “Needs Fresh Paint”; “Ready For Your Decorating Ideas”; “Needs TLC”; “Needs Updating”; “Great Starter Home”; “Longtime Family Owned”; “Unfinished Attic”; “Unfinished Basement”; “Priced To Sell”; “Code Violations”; “Tons of Potential”; “Foreclosure”; “Reverse Mortgage Foreclosure”; “Buyer Responsible For Village Required Repairs”; “Seller Does Not Provide Survey or Termite Inspection”; “Homepath Property”; “Homesteps Property”; “REO Property”; “HUD Home”; “Distressed Property”; “Fixer-upper”; “Fix and Flip”; “203K Eligible”; “Uninsurable”; “Needs Work”; “Handyman Special”; “Bring Your Contractor”; “Bring Your Ideas”; “Rehab Opportunity”; “Great Investment Opportunity”; “Great Value”; “Teardown”; “Make It Your Own”; “Mixed Use Property”; “DIY”; “Good Bones”; “Needs Cosmetic Updates”; “Attention Investors”; “Attention Rehabbers”; “Diamond In The Rough”; “Gut Job”; “Seller Says Lets Make A Deal”; “No Seller Disclosure”. There may be others and please send any you find to me !
- Check for-sale listings with only one property photograph or no photographs at all. This can be an indicator of an interior that may need updating, meaning no pictures are better than bad pictures.
- Check for sale listings to learn “How Many Days on Market”. A property on the market for 60 days, or 90 days, or more may be an indication there is something unappealing about the property. Maybe there is even a material defect making the property uninhabitable and preventing it from securing regular financing. I often see functional but outdated properties for sale for months because the potential buyers don’t know about renovation options and their Realtors may be unfamiliar with this way of purchasing property.
- A listing that has been cancelled or expired and then reactivated at a lower price may also be a good candidate for a renovation purchase. There usually is a reason why it is not selling. Check the listings history.
- Once you identify a property in need of rehab consider going to the local Building Department to check for any housing code violations. Also check to learn what additional updates may be required to secure a building Permit. I have seen towns require different wiring or wired smoke, fire & carbon monoxide detectors for example. These codes may be new since the property was built. Any extra code repairs will be a factor in a renovation budget. Learning about them up front is a good idea.
- Make your best offer on the property. There may be competition with “all cash” buyers so be sure to consider your initial offer may be the only chance you have to secure the property. Securing the property under contract at the desired or negotiated price locks the property down for you long enough to inspect it. Be sure to have a number days specified where you are allowed access to inspect the property. This period of time can be set up to allow you to thoroughly tour the property and learn if you still believe this is the property for you. If not you have set up the recourse to cancel and have your Earnest Money deposit returned during this specified period. Your Realtor or attorney can best advise you on the purchase contract specifics to facilitate this process.
- Next step is to go through the property you have identified during this initial period with an FHA Construction Consultant. The FHA Consultant may also be licensed as a home inspector. The reason I strongly recommend working with one is not only to identify defects as in any other home inspection but to identify safety, local code or health issues required to be repaired in a 203K or HomeStyle renovation. Additionally the FHA Consultant may write up a Scope Of Repairs document which details any health & safety required repairs, and any code violation repairs in addition to the desired updates the buyer plans on making. This “SOR” will also have projected labor & material costs per a database of such costs FHA requires the Consultant to use. In this way the buyer has a kind of “guide” to what such a renovation may cost to use as a check against estimates to be written up by contractors. This helps protect the buyer against unscrupulous or inexperienced contractors writing estimates too low or too high.
- Once the FHA Consultant has written the SOR or inspection report, if there are unexpected or costly repairs, it may be possible to go back to the seller for further negotiations. This is based on the severity of the defects uncovered by the FHA Consultant. I have seen this strategy used to secure a price reduction for a defective roof for example or broken water pipes when these issues were not apparent. It never hurts to try.
- Next step is to walk through the property with contractors. Usually I recommend having 3 contractors tour the property with the buyer explaining desired updates, repairs and changes in addition to what the FHA Consultant identified as required repairs. The key to working with contractors is to stress you need the work estimate written up with labor & materials cost detailed by task or category of repair and do so quickly to keep on schedule. Seeing 3 detailed proposals will allow you to choose the one that best fits you. Always consider whether you feel you can work with a particular contractor personally or not. I have written a separate Blog post on how to work with a contractor that you may find helpful.
- I always advise buyers to try to plan a renovation that may build equity. By this I mean there are areas where dollars spent yield a return on investment. Usually a new or modernized kitchen will add value to a property. Updated baths, new flooring, new lighting or additional bedrooms and baths may all add more equity into the property. It is in building equity that buyers realize one of the benefits of purchasing and rehabbing such properties.
- Once the selected contractor presents the detailed work proposal the renovation lender will use it to order an “as completed” appraisal. This type of appraisal shows what the property will be worth when all planned remodeling is completed. This is the end result of purchasing a property to rehab. Ideally this valuation report will show the newly created equity or discovered “hidden equity” in the property. The loan will then be processed & approved based on this appraisal and a closing will be scheduled. Once the closing occurs the fun part of seeing your vision created begins !
I hope this has been a helpful guide and encourages both buyers and Realtors to look for property to rehab. The process can be a win for everyone ! Please send me your questions and comments any time to firstname.lastname@example.org.
Perry Farella 773 248 8422
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