Repairing Distressed Properties
Terrific bargains are being found among short sales and foreclosures.  Real estate investors are taking their fair share, but many are being purchased by owner-occupants, including first-time homebuyers.

But a problem, especially with foreclosures, can frustrate buyers with limited resources: Many homes need work; some are not even in livable condition.  As a homebuyer, you may have enough money for a downpayment and to fund your reserves, but no money to do upgrades and repairs.

If you have the funds to do the work, your lender probably wants the work completed BEFORE funding the loan.  The best deals are on bank foreclosures but it also seems that these properties seem to be the
hardest to purchase because of the amount of fixup work required. 

What can you do?  For buyers of homes that need minimal work to meet the lender’s requirements, find out specifically what will be necessary.  If the owner is a bank, they might be willing to make the repairs if the work can be done simply, cheaply and, most importantly, quickly. If you are fully approved and the repair is the only bar to a quick settlement, banks are now willing to negotiate in order to get the property off their books.

If the seller is the owner-occupant, you have the ability to negotiate until the matter is resolved to your satisfaction.  This is an area where you can look to your Realtor for valuable assistance.  What about situations where the home might require considerable work? Consider the situation where you find the home in the right neighborhood at a price you can afford, yet nothing inside the house appeals to you. 

The kitchen and its appliances are dated; the bathrooms need to be
renovated; new energy-efficient windows and doors are needed and
carpeting and a fresh coat of paint would be nice too.  The chances that the seller will redo the home are non-existent and financing all that work on your Sears and Home Depot credit cards (at double digit interest rates) doesn’t thrill you.

The solution? Consider doing a FHA 203k streamline loan.  So long as you are using a licensed contractor, none of the work is structural and the total bill is less than $35,000, you can purchase a home and totally renovate it with one loan.  To put it in other words, you can buy the house, get a brand new kitchen with top of the line appliances, with the countertops you fantasized about; all the bathrooms redone; new windows and the color and grade of carpeting you want with fresh paint at an affordable monthly payment.

Let’s say that you can purchase the home in as-is condition for $250,000.  And let’s say that all this work can be done for $35,000.  In the traditional approach, your downpayment in a FHA loan would be 3.5% or $8,750 and your PI would be $1,295.08 (at a 5% 30-year fixed rate).  Then you would put $35,000 on your credit cards and, on average, you would be paying an additional $950 per month as a MINIMUM monthly payment.

That creates a $2,390 monthly commitment that also ties up your credit due high credit card balances.  With a FHA 203k, your acquisition cost would be $285,000 (purchase price of home plus the $35,000 in improvements).  Your downpayment would increase by $1,225 to $9,975 and your PI would be $1,518.70 (at a 5.25% 30-year fixed rate) or $223 per month more, but it would be tax-deductible, since it is part of your original mortgage and your credit would not be encumbered by $35,000 of credit card debt that is not tax-deductible.  Another benefit is that professionals would do the work before you move in, so that trying to get settled while the renovations are going on would not disrupt your life.

Is this an oversimplification of the benefits? Maybe a little. You will be
paying for taxes and insurance in both.  You might have wonderful introductory rates on your credit cards for a year that could cost you less. You won’t get that feeling of satisfaction of doing some of the work yourself and you won’t have something you can count on having to do every evening and every weekend. The cost for these loans is only a 0.25% premium over regular rates.  It is a very small price to pay for the perceived extra risk and work that this loan requires. 

If you need more than $35,000 and/or if structural work is required, the same rate bump of 0.25% is demanded, but you will have extra costs due to special inspections and permits.  Consider also in the above example, if you are a first-time homebuyer, you would get $8,000 back as a tax credit so long as you purchased the home by December 1, 2009 effectively making your downpayment less than $2,000 with the gift from Uncle Sam.

Look at it this way, you get the home the way you want it, at some of the lowest rates in history and you help your local economy. So you can do it for yourself and do good for your country.  © 2009, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc.

This entry was posted on Tuesday, April 14th, 2009 at 2:58 pm and is filed under 3) General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.