A Brief Introduction to Renovation Financing

Hello buyers, sellers, homeowners, attorney’s and real estate agents.  This blog will contain a compilation of newsletters and my thoughts and findings on renovation financing.  You will notice that many of the blogs that i write are made for real estate agents as they are usually the first to recognize the need for rehab financing. 

There are a variety of different renovation / rehab financing available on the market.  There is the FHA 203K, the Fannie Mae Homestyle, local bank proprietary products and hard-money.  I will go into detail into each under a seperate heading and a seperate blog, but they all have the same thing in common.  Each of the loans allows you to purchase/refinance real estate and include with the new loan the money to repair the property.

With stolen copper pipes, no heating systems and homes in general disrepair due to foreclosure actions and lack of upkeep; the renovation loan is the buyer and real estate agents best friend.  Many times, a buyer will want to finance a purchase of a home, but the bank says that they will not provide the mortgage until the repairs are performed. BUT….the owner (usually a bank) will not do the repairs, nor will they let the buyer do them before closing!!!  The renovation / rehab loan is the perfect solution to the Catch 22 dilemma that homebuyers are facing!

That is it for now…  this is just an introduction.

Investor Renovation Purchases!!

IT IS TIME!!!!

I have gotten call after call after call this week and last week. For what you may ask? It is the new hot market that is calling me. Investor purchases!! More often than not, it is investor renovation purchases that I am getting calls on. We are at that tipping point in the market where investors see the value of purchasing properties at rock bottom prices. Most of the best deals to be had are at deep discounts because the property needs work. Many of these properties can not be financed because of property condition. In order to sell these properties or buy these properties we need to understand what financing is available. So here you go……. If financing the purchase and renovation of a single family property the investor needs 25% down payment based on the cost of the property plus the cost of renovation. A 2-unit property requires 30% down. The above two programs are available for conventional renovation financing with a 740 or better credit score and full income verification. A big issue that many investors will face, whether buying a fixer upper or a property in good condition is that conventional financing will not allow the buyer to own more than 4 financed properties, including their own home. There is portfolio money available for those investors looking to fix and re-sell. Usually the credit score and income is less of an issue here. But the buyer will need 20-30% down payment and can buy a 1-4 unit property. Usually this carries a 12% interest rate and 5-6 points. It is also a one year loan with a balloon. Some investors may be eligible for longer terms. The seller can pay the points for the buyer. It seems expensive but when you work the numbers there is still money to be made for the investor. Go get em!!!!!!!

 

Realty Reality Tips by Marylyn B. Schwartz

I am so excited to add this column to the renovation times. Our selling tips our now written by Marilyn Schwarz. – mp Marylyn B. Schwartz, CSP, is a noted expert in real estate and corporate sales training and team development. She is president of her company TEAMWEAVERS and a Master Trainer for the most successful real estate sales training program to come along in more than 20 years, Leader’s Choice. She is an author, real estate monthly columnist, meeting facilitator and Business/Life Coach. In 1999 she was awarded the prestigious designation of Certified Speaking Professional (CSP) by the International Federation of Professional Speakers. Fewer than 10% of members worldwide achieve this level of excellence. Marylyn’s presentations and keynotes are dynamic, content filled and fun! Contact Marylyn at teamweaver@aol.com, 203-798-8031 or www.marylynbschwartz.com. Realty Reality Tips and Techniques For Success! Do call your presentations: Marketing Presentations Don’t call them: Listing Presentations… The last thing the public believes that we need are more listings (unless they are saleable!) Do remember that a listing agreement is a promissory note. Don’t think of your listing agreement as anything but. If you don’t collect on the promissory note at the end of the listing period, it is nothing more than an indenture! Do bring your homes to market in a way that will compel a reticent/scared buying public. Don’t bring the home onto the market when you know it will never sell at the price THEY want. It has nothing to do with what is wanted. The appraisers are driving the ships! The facts rule. Do go after expireds on a daily basis. Don’t call them. Knock on their doors!!! Don’t ask them if they are interested in listing again. Why in heaven’s name would they want to LIST? If they even consider bringing the home to market again, what they want is to SELL it! So, just ask them, Has anyone told you why your home did not sell?” Make an appointment, and do so.

Ten reasons to use FHA 203K renovation loans

1. There is no limitation for declining market areas.
2. Down payment is available from at least 22 different sources. Request my e-book to find out what they are.
3. Use 110% of after completed value.
4. No waiting for repairs to be finished before closing.
5. Finance a mixed-use property with only 3.5% down-payment.
6. The seller can pay all closing costs up to 6% of the sales price.
7. Do repairs to all the units of a four unit home.
8. Escrow mortgage payments for up to six months, so the buyer can do repairs while they are still renting.
9. Properties with no heating system, stolen copper and broken windows can now be financed.
10. THE #1 WAY TO GET THE BEST DEAL POSSIBLE ON A HOME!

Bonus: Non-occupant cosigners are single family properties are OK.

Remember all Renovation Times articles can be found on my blog.

What to expect during the renovation loan process

Matthew Perillie – Renovation Specialist – Campbell Mortgage

            Renovation loans have become an integral tool in helping sell much of the bank owned inventory currently on the market.  From the stolen copper to the lack of upkeep, many homes either require renovation financing or could sell quicker with the suggestion of making a dated house a ‘dream home’.  Rehabilitation loans take time.  It is important that all agents involved in the transaction understand this.  Otherwise, we will all be dealing with phone calls and stress that are totally unavoidable.  If a loan officer tells you that they can get a renovation loan done in 30 days they are not experienced in this type of financing.  The longest delays come from the contractors involved and are usually something we have no control over.

            Here is a typical renovation loan timetable:

 

1. House is placed under contract.
2. I have initial meeting with the buyer to get them ready for the process.
3. The home inspection and HUD inspection are performed.
4. The contractors get into the property and put together their price quotes.
5. Contractor, buyer and HUD inspector (if FHA) negotiate a fair price for the work to be performed
6. The contractor provides a contract for the work to be performed along with insurance and references.
7. The HUD inspector does a final work write-up.
8. NOW…the appraisal can be done (based upon the work write-up and contract.
9. The application is taken.  The application can not be taken until we know how much the buyer needs!!
10. Loan submitted, approved and closed.

 

 

As you can see there are a few extra steps that are not included in regular mortgage financing.  The longest delays come in getting the contractor to the property and getting additional estimates from subcontractors if needed.  It is important that the real estate agents try to let these subcontractors and contractors into the house as soon as possible to help avoid delays.

 

As always, I will push the process along as quickly as possible and have the added luxury of the local HUD inspector sitting two desks away from me.  I will also tell you that the Robert Canty, my HUD Inspector, is also a licensed home inspector.  He can do both jobs at once, saving your buyer money and saving all of us time!!

 

 

Wallingford Real Estate is Still Good!

 

I am often asked when I think “things” will turn around.  Well, I decided to research the business in our area and determine where “things” are now.   My investigation uncovered a curious circumstance; that is, while it is true that unit sales are lower compared to previous years the demand curve over the last twelve months has stabilized and exhibits characteristics’ of a normal real estate market. 

 

This table is drawn from analysis conducted by the University of Connecticut, Center for Real Estate and Urban Economic Studies.  The evaluation is based on data developed by the Warren Group, publishers of the Commercial Record and concentrates on single family purchase transactions. 

 

From the Fourth Quarter of 2007 through the Third Quarter of 2008 unit sales, allowing for seasonal adjustment, show that the demand curve is stable.  Further, sales price at all three levels, when measured by the last four quarters, show stability rather than a decline in values.

 

Yr	Qtr	#Trans	Low	Mid	High
2007	1	68	$254,624.00	$296,722.00	$381,777.00
2007	2	92	$256,551.00	$283,475.00	$401,438.00
2007	3	108	$240,748.00	$278,785.00	$394,664.00
2007	4	83	$250,616.00	$265,681.00	$391,863.00
2008	1	43	$235,001.00	$286,095.00	$368,177.00
2008	2	83	$237,933.00	$268,215.00	$372,556.00
2008	3	51	$247,011.00	$284,455.00	$368,922.00

 

 

So now when I’m asked when “things” will turn around; my answer will be “they’ve” already started.

Renovation Mortgages for Investors

    There are many renovation financing options available for investors.  I think now is the time for investors to learn their options.  Purchase renovation loans are a great way to find a great deal and have instant equity!  Call your realtor, past clients, talk to people when you are in line at the grocer (do we even say grocer anymore??), or call local contractors.  Make ten calls a day and find these are great deals to be had on properties that need work.

     Investor renovation works much like the FHA 203K renovation loan.  It requires a larger down payment.  Twenty percent on single family and twenty-five on two family projects.  The buyer does get to finance the repair cost into the loan, just like the 203K.  On a three unit or more, more down payment at about 30% will be needed. 

     Three and four unit investor renovation projects usually are thru private money or hard money investors, but because of this will usually move quickly to closing.  I just received a call from an agent that said ‘his mortgage guy’ could not get a mortgage done because of property condition.  I say use poor property condition as a way to own CHEAP!

Campbell Mortgage is #1 203K producer

I recently received a referral from an agent (I love those (referrals and some agents)). The agent sent me a buyer that was purchasing a condominium that needed renovation. FHA allows us to lend renovation funds on condos, but the renovation can only be performed inside the condominium walls.
There was however a problem with doing a renovation on this property. The condo had 15 units all under one roof. FHA 203K renovation money can not be lent on a condominium that has more than four units under one roof. Here is where the story turns sad. I explained this little known rule to the buyer and gave her the option of using the Fannie Mae Homestyle renovation loan on the property. This would have worked great.

…BUT…
An inexperienced broker told him that I was wrong and that the deal could be done. After paying a home inspector, an appraisal and a credit report fee the loan was declined for….you guessed it…the units in the condo. Fortunately, we were able to save the deal for them.
The moral of the story is that renovation is a product that needs to be handled by EXPERIENCED professionals. Campbell Mortgage was ranked #1 in FHA 203K renovation loans for this most recent fiscal period. We have the experience.

Purchasing HUD owned homes

Here is some usuful information when you are purchasing a HUD owned home.  There are also some little known facts in here that are very useful to know and use.

203(k) Important Contract Items when Purchasing a HUD owned property

q     Selling brokers must indicate on line 4, Form HUD-9548, that the buyer intends to obtain 203(k) financing.  I have a newsletter available called, ‘How to Make an Offer When Using Renovation Financing’.  If you would like a copy just email me at mperillie@campbellmortgage.com.  I also can make a sample contract available

 

q     After the bid acceptance by HUD, the selling broker should arrange to have the utilities turned on in the purchaser’s name to ensure the working condition of the heating, plumbing and electrical systems. If the utilities are not turned on for inspection, a 15 percent contingency reserve will be required. Usually only a 10% reserve is required. If the utilities are subsequently turned off, the purchaser is responsible to notify the HUD Field Office and re-winterize the dwelling, if necessary. All costs are borne by the purchaser.

 

q     Successful bidders will be given 60 calendar days to close the 203(k) insured loan. Sales contracts should include the following addendum:

 

q     Contract Addendum

The purchaser agrees to make all additional improvements required by HUD or the lender, provided the improvements are intended to bring the property into compliance with the Requirements for Existing Housing in HUD Handbook 4905.1. The purchaser must submit the architectural exhibits to HUD or the Direct Endorsement Lender within 15 calendar days of bid acceptance or be subject to forfeiture of the earnest money deposit if the property transaction does not close.

 

q     To eliminate the need for double closings, an extension to the sales contract may occur beyond the 60 day time frame; however, nonrefundable fees will be required by the HUD Field Office as a condition for granting an extension. In addition, the earnest money deposit may be forfeited should the transaction not close.

 

q     If HUD determines at a later date that the property is not eligible for 203(k) insured financing for reasons beyond the control of the purchaser, the purchaser will have the option to have HUD refund the entire earnest money deposit and any extension fees to the purchaser, or continue the sale without the benefit of any FHA insured financing.

See next post about lead based paint – very important!!

$7500 Tax Rebate

The $7500 Question
By Matthew Perillie

Many of my past clients have been asking me about the $7500 first time homebuyer tax credit that was part of the governments recent ‘modernization act’ legislation. Whether or not ‘modernization’ is the correct word is a debate for a different newsletter. I do have my doubts. Anyway, the $7500 tax credit is a tremendous tool that has come out of this legislation. If you use the information that I will give you on this, along with the information that I provide in my ’22 Ways to Fund a Down Payment’ e book, you will see many ways to purchase a home now. By the way, it is the right time to purchase and when we purchase homes we help the economy. I will soon be releasing a recorded interview with an accountant on this matter that will give more details on the subject. Lastly, I am not an accountant nor am I bright enough to be one. Discuss tax strategies with your accountant and financial advisors.

In a nutshell, the government is looking to help promote home ownership (and spur the real estate market) by giving first time homebuyers a $7500 tax credit if they purchase a home between April 9, 2008 and July 1, 2009. This is not a gift (what is when it comes to government). It is an interest free loan that is repayable over a maximum of a fifteen year term. The great thing is, when you buy your first home, you get all these great tax deductions that you did not have before. At an increased tax of $500 per year, to repay the loan, you will not feel the pain because of the tax deductions.

There are some caveats to all of this. You must be a first time homebuyer. This is defined by the buyer or the buyer’s spouse not having owned their principle residence over the past three years. There are income limits. Single tax payers with income up to $75,000 and married couples with incomes up to $150,000 annually qualify for the full tax credit. Buyers will qualify for a partial credit if there income falls between $75,000 and $95,000 filing single and $150,000 and $170,000 filing married. Also, of you sell your home and make a profit, you will owe the government the loan money back minus what you have repaid.

To file for the tax credit all that has to be done is claim it on the tax return. There are no additional forms to be filled out. The juicy part of this is, it is a tax credit, not an income tax credit. If a buyer that qualifies for the full tax credit has a tax liability of $15,000 and had already withheld $14,000, they would usually owe $1,000 to the government. Add the tax credit and this buyer will get a check from the government for $6,500. If they owed no tax they would get the full $7500!!! That is a down payment! It gets better………

Buyers that qualify for this tax credit can elect to file for the credit on their 2008 taxes for a home purchased in 2009. This can help a home buyer get their down payment money back that much quicker. This is where a buyer would want to talk with an accountant of qualified advisor. It is possible that filing for the credit in 2009 may get greater benefit. I am not done. How about this…..

In order to help accumulate down payment, a prospective home buyer may elect to reduce federal income tax withholding, in order to accumulate down payment funds. This is assuming that the tax credit will make up for the difference. This is a great tool to help locate down payment funds. If the buyer does not qualify for the credit however, they will have to pay the tax and may suffer penalties and late fees. It is best to discuss with an accountant if you are going to use this strategy.

This is a great tool. If you already purchased, talk to a financial advisor, get your money and invest it. If you are buying a home, here is another way to recoup or fund you down payment. If you have any questions or would like to request a copy of my recorded interview with my accountant on this matter please email me at mperillie@campbellmortgage.com or call me at 203.937.3343.

Renovation Times Issue 5

 

		Happy Thanksgiving!
Campbell Mortgage Renovation Times				Matt Perillie Connecticut’s Premier Renovation Specialist (203) 937-3343 (203) 430-5930 cell mperillie@campbellmortgage.com ‘We know what we’re doing. We’ll give you straight answers’
	“Men are born to succeed, not fail.” Henry David Thoreau
A Humorous Moment			Links to Government REO’s
			FHA		http://hud1.towerauction.net/CT.htm
			VA		https://va.reotrans.com/index.cfm?
			FNMA		http://reosearch.fanniemae.com/reosearch/
			Freddie Mac		http://www.homesteps.com/hm01_1findahome.htm
			FDIC		http://www2.fdic.gov/drrore/
			Frequently Asked FHA 203K Renovation Lending Questions
			How many draw releases can be scheduled during the rehabilitation period?   As many as five (5) releases (four plus a final) can be scheduled. If the cost of rehabilitation exceeds $10,000, then additional draw inspections are authorized provided the lender and the borrower agree in writing. The number of releases is normally dictated by the cash flow requirements of the contractor. An inspection is always required with a scheduled release; however, inspections may be scheduled more often than releases if necessary to ensure compliance with the architectural exhibits, HUD’s Minimum Property Standards and all local codes and ordinances.
Selling Tips
I often have realtors asking me how to present an offer on a renovation loan.  Do they reference the renovation cost in the contract?  How do they put the cost in the contract?  If renovation take longer than a conventional loan, will a bank on REO allow us more time to get the loan closed?  I answer all of these questions AND provide a sample contract in my special report, “How to make an offer when using renocation financing”.  Just email or call me for it and I will send it to you!! Keep Selling – Matt

 

Renovation Time Issue 4

Happy Thanksgiving!

Campbell Mortgage
Renovation Times

Matt Perillie
Renovation Specialist
(203) 937-3343
(203) 430-5930 cell
mperillie@campbellmortgage.com

“Men are born to succeed, not fail.”
Henry David Thoreau
A Humorous Moment Links to Government REO’s

FHA http://hud1.towerauction.net/CT.htm

VA https://va.reotrans.com/index.cfm?

FNMA http://reosearch.fanniemae.com/reosearch/

Freddie Mac http://www.homesteps.com/hm01_1findahome.htm

FDIC http://www2.fdic.gov/drrore/

Frequently Asked Questions
How long do I have to complete construction?

Construction must begin when the mortgage loan is closed. If work is not started within 30 days, or if the work ceases for more than 30 consecutive days, or is not progressing reasonably during the rehabilitation period, the lender may consider the loan to be in default.

The length of the rehabilitation period will be no longer than six (6) months. However, the lender should not allow a time period longer than that required to complete the work. Where the rehabilitation work is not complicated, or where a contractor should be able to accomplish the work in a reasonably short time frame, a 2 or 3 month rehabilitation period would be justified. If a shorter time period less than six months is specified in the Rehabilitation Loan Agreement, and the work is not completed within that time frame, the borrower/builder must request an extension of time on Form HUD-92577 for consideration, providing adequate documentation to justify the extension.

Another tool to help you sell!!
“I was showing a couple house after house after house. They were well qualified buyers but just could not make a decision. As we were looking at what felt like our 100th property, the buyer mentioned that if she could move the kitchen from this house we were looking at into the SECOND home that we saw, she would buy it. I suggested to them that, while they could not move this kitchen they could certainly use a renovation loan to obtain the money to build the kitchen that they wanted. They are now extremely happy homeowners and have referred other buyers to me that, once they saw what they could do, have purchased homes using the same product. I am convinced that I show them less houses because they buy in the area that they want and MAKE it the home that they want.”

Jonathan Carbutti
Carbutti and Company

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FHA 203(k) Quick Facts

A FHA 203(k) mortgage
can be used to finance a
mixed use property.