For some time, I have been helping clients finance their home renovation projects with a number of renovation mortgage types including HomeStyle*, FHA 203k and more recently the VA Home Renovation loan for Veterans. There are also rehab loans for Investors who lease or fix and sell (flip) 1 to 4 unit properties I have access to.
One common thread through most renovation projects I may have overlooked is, there is often a home that, in some small way may help improve the local neighborhood when its done. Some of the properties I assist with rehab mortgages are foreclosures for example. Many of these are in bad shape, some really not even livable or functional. A property like that can sit derelict for some extended period of time. A boarded up property on the block may not be appealing to some buyers or worse it may be a magnet for criminal activity.
In some cities there may be neighborhoods with more than their fair share of these kinds of empty properties, waiting for new life. But the local conditions may be right for a renaissance in some of these areas. One of the reasons I write this Blog is to educate buyers or owners of the existence of these types of rehab loans. In other words, if there is an opportunity and desire to restore a property, even a first time buyer can be empowered to do it. Perhaps even in an area where prices are depressed to gain maximum benefit. Plus potentially helping to improve the neighborhood as well.
I recall a Chicago 2 flat (a kind of brick duplex with two apartments in 2 stories ) that was a foreclosure, long ago processed through the system and sitting empty, decaying. These structures were built in large quantities in first half of 20th century Chicago. They were made of brick and built to last a very long time. A client of mine bought this 2 flat property using an FHA 203K Renovation loan. The 203K loan is designed to restore a property to safe and livable use, replacing anything from mechanical systems like heating, air conditioning, electric wiring, plumbing to kitchens, baths, landscaping, etc. all funds in the same 30 year loan. The end result was a 2 apartment structure with new windows, new baths, new kitchens, refinished hardwood floors and so forth. Everything was done to today’s standards down to outlets with USB ports. Effectively the interior was brand new inside this well-built 100 year old brick shell.
But perhaps unseen is the inspiration one restored property can be for a block or neighborhood. Neighbors or potential buyers can see a home is undergoing a restoration project and see progress almost weekly. Then at completion the home is ready for a new family and may well last for the next 100 years. A restored home can become almost a beacon attracting others to the area to do the same thing on other properties. That is really one of the core principles of any type of renovation financing, to both help preserve properties and help preserve neighborhoods. In fact, another client later bought a similar 2 flat a block away also using an FHA 203K rehab loan.
One of the best aspects of renovation lending in my opinion, is the fact the properties are appraised to their future, “as finished” value at the beginning, when purchased, prior to any rehab starting. This is really what makes all the difference in securing the funds to rehab the properties. Lest say there is a property needing almost everything from a roof to plumbing to HVAC selling for $90,000 and it is a 2 unit with two apartments. The renovation budget, as determined by a General Contractor, is $200,000. Now that may seem like a lot but when doing a gut rehab to replace everything and bring it to today’s standards with dishwashers and washer/dryers in each apartment, separate HVAC, etc. that budget may be appropriate.
The key to making this all work out is that the property will be appraised, (using a written document from the General Contractor describing the work and costs), to the value it will have upon completion. That process of projecting the future value in advance involves an Appraiser looking at other similar properties that already have been rehabbed across the general area in comparison to what is to be done to the subject property, to arrive at a value. In this example with a $90,000 purchase price plus $200,000 for rehab it would be expected the “as finished” value should be at least that much and ideally more.
Perhaps a more intangible benefit and possibly overlooked one is there may be a visual improvement in the area, on that block, once everyone sees a newly restored property there. A property that is once again attractive and inhabited. In other words, using a renovation loan to improve a block or neighborhood one house at a time. There is a potential that may encourage others to try the same on other blighted properties resulting in helping a neighborhood become a more appealing place for new families to live.
I wanted to write a bit about this aspect of renovation lending that may be helpful to those, including first time buyers, who have an interest in restoring a property. If the property is located in an area where sale prices are currently depressed and there is potential for overall improvement, then a renovation purchase loan can help you and perhaps help the neighborhood.
In other posts I have written more about the steps involved and presented examples if you review the “How2FundRenovation.com.”
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!