Tuesday, May 24, 2011

A little old house of your own

[source: Wells Fargo Mural]

Originally I had a different entry planned for today but there were so many questions swirling about on various forums that I think I have to post this one first ..

"Advice from a novice historic home buyer"


"Buying a Fixer-Upper without having to rob a bank first"

There seems to be the misconception going around that you need a hefty bank account before you are allowed to even think about buying a property that needs work. Fortunately that is not true.

I say fortunately because not only is there a way for the historic home lover to buy a 1915s Bungalow or 1880s Victorian without having to wait for a huge inheritance or a winning lottery ticket to come their way, it also is essential to moving a lot of properties in today's real estate market.

While there are numerous home decoration and renovation blogs the sad truth is that there are also a lot of people who had to give up on making any improvements to their homes. Some even had to stop working and maintaining their homes entirely thanks to the economy tanking and taking the housing market with it (or was it the other way 'round?).

Either way, there are a LOT of distressed properties on the market. Whether it's a foreclosure with a leaky roof, an auctioned off 1980s Ranch with a missing ac compressor or a darling Victorian in need of new wiring and plumbing - they all need work and it doesn't come for free. What's a home buyer to do?

The magic words are "FHA 203(k) loan". This rehab loan was created by the Federal Housing Administration and is designed for people who want to rehab or repair a distressed property to use as their primary residence. Purchase price and rehab costs get wrapped into one mortgage package with one monthly payment. While it's not for the typical investor you -can- buy a multi-family residence, live in one unit and rent out the other(s) [up to 4 units max under this loan]. Since 203(k) loans are endorsed by the government, they encourage lenders to offer what's usually considered a slightly risky deal.

You'll have to poke around a bit to find a lender who has experience with such a rehab loan - not every lender offers them - but once you find one and meet the usual FHA requirements for a loan you're are usually all set to find the distressed property of your dreams! We had the same experience applying for the 203(k) loan that we had with a regular FHA loan: smooth sailing if you meet the typical FHA loan requirements.

There are two types of FHA 203(k) mortgages: regular and streamlined. The only difference is that regular 203(k)s are for properties that need structural repairs (foundation but also removal of walls, etc) and streamlined are for those that need only non-structural repairs and do not exceed $35,000 including all fees and a 10% contingency fund. The loan does not only finance the big ticket items such as electric, plumbing, foundation and so on, you can also finance new kitchen cabinets and appliances, interior and exterior paint and much more with it.

You don't have to use a contractor but you have to show that you are qualified to do whatever work you proposed. We felt that having a general contractor was well worth the extra - and what we considered reasonable - expense: their experience and advice not to mention their efforts in orchestrating the timely execution of work done by sub-contractors was invaluable.

Yes, there is extra paperwork involved which is why an experienced lender as well as an experienced contractor (experienced with both, the kind of house you're rehabbing as well as the 203(k) paperwork and funds draw process) are a must but other than that this is a very do-able project and not as far out as some people might make you believe. No, really.

Step by step:

  • find your historic neighborhood: each one is so different and unique.(optional but recommended: rent a historic place for a test run and find out if you can live with the many quirks of a historic home)get your paperwork in order and pre-approved for a mortgage.

  • make a list of things you are looking for in your home

  • start looking for a home using a real estate agent who knows your target neighborhood. It really makes a difference!

  • find a good contractor who has experience with historic homes. Recommendations from neighbors in your historic neighborhood are usually your best bet. It also helps if your contractor has dealt with the accounting system of the 203k loan before.

  • Once you find "The One" meet with your contractor for a first walk-through. Have a list ready of which things you noticed/want done as part of your renovation loan. Compare notes with your contractor. He might recommend works you haven't considered yet

  • Make an offer (and have it hopefully accepted)

  • Get your home inspection. Do not, never ever skip this step. Try to find an home inspector who has experience with historic houses and the way they are built.

  • Sit down with your contractor to modify the renovation bid to include issues found during the home inspection. Your lender might require you to add items based on the inspection report.

  • Tackle all necessary paperwork. Most of it will just happen naturally (title search, survey, etc.) . A 203(k) loan will also require an appraisal - basically your lender wants to make sure that they'll be able to recoup the money they are lending you so they have a professional appraise your house and

  • Close on your house and begin your rehab!

That wasn't that difficult, hm?

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