From Mr. Steve Harney's Keeping Current Matters Blog Posted on March 4, 2010
The FHA 203(k) Renovation loan may be the most important, least known, and underutilized government loan that could save the Real Estate market in 2010 and Beyond…
The Perfect Storm
Over 2 million homes were foreclosed in 2009 and more are expected this year. Property values have declined significantly, and many economists expect property values to continue to decline into 2011. Many of these homes have not been maintained nor updated and have old or antiquated electrical, plumbing systems, heating, roof, insulation, windows, doors, appliances, etc. Cash-strapped homeowners losing their homes convert their updated air conditioners, heaters, cabinets, countertops, doors and appliances into much needed cash by selling them on eBay, Craigslist or at garage sales; Vacant homes get vandalized for any remaining valuable items like copper wiring, plumbing, light fixtures, and switches.
According to the Harvard University Joint Center for Housing Studies, 1/3 of all homes nationwide are old, 25 to 45 years old; and another 1/3 of all homes are older, 45+ years old. Our aging housing stock needs to be updated, modernized, and retrofitted to utilize the advances our building industry have made in the last 15 years. Lack of liquidity in the mortgage market and consolidation of the mortgage originators reduced the amount of funding sources for new mortgages. Lenders of traditional types of loans including Fannie Mae, Freddie Mac and the standard FHA consider these properties poor collateral and won’t fund loans unless the work has been completed and the home is habitable.
The Dilemma
When Banks acquire these homes through foreclosure, what are their options? They know that a pristine home with new paint, carpet, appliances and crown moldings will sell fast and for top dollar. Unfortunately, they don’t have the manpower to manage or the cash to invest the $20,000 to $35,000 to bring an old run down house to modern standards. There also remains the risk of starting a rehab project only to uncover some larger more expensive issues that could compound the banks losses, not to mention the potential for additional vandalism once the work is completed. First time and move up buyers are getting forced out of the market because these properties will not qualify for traditional financing due to the condition of the home. This brings in cash-buyers who want a deep discount on the property, thus driving the prices down further.
The Solution
The FHA 203(k) Renovation loan, available as a purchase or refinance, established in 1978 by the US Congress to revitalize our nation’s housing stock was ahead of its time by about 30 years. The authors of this loan program must have seen this housing market coming. The 203(k) allows an owner occupant home buyer to purchase a home in need of repair and get funding not only to purchase it but also to fix it up in one loan. It allows the seller to sell and close a home “As-Is” no matter how bad the condition is. A home could be condemned, it could have a cracked slab or damaged foundation, code violations, fire damaged, leaking roof, or no kitchen. The buyer can close it “As-Is” and include funds to fix up the home in one loan.
A Real World Example
A buyer finds a home in the right neighborhood, on a good street, but it is old and was vandalized. The home is listed for $200,000 and needs a new electrical system, plumbing, heating, kitchen and bathroom remodel, paint inside and out, refinish the wood floors and carpet in the bedrooms. The total repair cost is $50,000
Purchase Price: $200,000
Renovation Account: $58,000 (Includes 10% contingency reserve, Inspections and other soft costs)
Total Acquisition Cost: $258,000
Base Loan Amount: $248,970 (Buyer must qualify for a loan at 96.5% LTV)
Down Payment: $9,030 (Minimum down payment is 3.5%)
The buyer gets to make a wish list Once the property is inspected and any deficiencies and FHA required improvements are identified, the buyer gets to make a wish list of the home improvements they want to do to their home. Dual pane windows, new entry door, interior doors, new paint, carpet, cabinets, countertops, appliances, add a second floor, a master bedroom, a bonus room, finish a basement, add units, upgrade the electrical, plumbing or HVAC systems; landscaping walkways, decks… its almost endless the types of improvements you can do…
Source: http://kcmblog.com/2010/03/04/3250/