As the foreclosure inventory increases, more an more homes across America sit vacant and dilapidated. The longer they sit the harder it becomes to obtain traditional financing because lenders don’t want to lend on collateral in disrepair. As they continue to sit the price continues to drop until an opportunistic investor, with cash in his pockets, usually ends up purchasing the home, renovating it and selling it to you at a huge mark-up. What I want to illustrate to you in this article is that investor, the MIDDLEMAN, and his eventual mark-up is unnecessary. YOU can do what he is doing and you can secure yourself a fortune in equity in the process and you can do it with almost NO MONEY DOWN.
What that investor doesn’t want you to know is that renovation products for people wishing to renovate a primary residence are available at fantastic fixed rates through an American staple since 1965, the Federal Housing Administration (FHA). FHA offers a product designed for you to help rebuild American homes and revitalize neighborhoods across the USA, the FHA 203K program. In the process you get you get to create a home designed to your specifications and secure yourself thousands in equity in the process. Have you always wanted to sculpt a house into exactly what you wanted for you and your family? No problem, with FHA 203K loans you can create that dream home, you can buy it for next to nothing and YOU can reap the rewards that real estate investors have been reaping for years.
Here’s how it works:
1.) Home Buyer contacts FHA approved 203K Lender for pre-approval. Always get pre-approval before searching for a home. Realtors are busy people too and it isn’t fair to them to have them shuttle around unqualified home buyers. Now, FHA 203K lenders are hard to find, it isn’t a very well-known program and it takes highly specialized knowledge so it may take some searching to find a lender who does them. I will assume since you found this article that you can make use of all your tools on the internet to locate someone qualified. If not call me and I will direct you.
2.) Home Buyer locates a distressed property priced well below value in a neighborhood they want to live. In other words look for the ugliest house in the best neighborhood. Remember, condition of the property is not important as the appraisal and the loan are based on AFTER REPAIR VALUE. HUD foreclosures are often some of the best deals, but any distressed property will do.
3.) Home Buyer contacts his Realtor (always use a Realtor when purchasing foreclosures) and gets them to make an offer 20%+ below list price. Please note that 20% is not the magic number, but it is a good starting point. Much of what you will offer will depend on time on the market and other factors. This is what the Realtor is for, use their talents to help guide you on the offer. Make sure that the contract states you will be getting FHA 203K or Fannie Mae Homestyle renovation loan. Also make sure it includes closing costs as these loans are slightly more expensive than traditional loans.
4.) Offer is accepted! Congratulations, you have a beat up dilapidated eyesore of a home. Don’t worry though, this is where it gets fun.
5.) Home Inspection — Always get a home inspection! I don’t care if the property was built last year. Just do it! The home inspection is the first step because he will tell you what needs to be fixed to bring the house to code and to make it acceptable to the lender. Once he has told you what HAS to be fixed now you get to decide all your extras and upgrades.
5b.) Meeting with the FHA 203K Consultant — Some FHA loans require a consultant to help with the draw requests and coordinate everything with the lender and the contractors. They are required for any renovation over $35,000 and some under. Talk to your lender to see if you need a consultant, but if you do need one then getting one involved at the same time as the home inspector is a good idea.
6.) Contractor Walkthrough — This is the step where you get to begin painting the picture for the home you have always wanted to live in. Call three contractors and walk through the house letting each know what you want done. They will prepare bids so we know the scope and cost of the repair. Don’t always go with the lowest bid. Go with the person you feel most comfortable with.
7.) Home buyer and lender will package loan for submission. This is the boring part, luckily your lender will handle most of the dirty work. Make sure you stick to their time lines and get documents when they request them.
8.) APPROVAL! You are know the proud owner of an ugly house. Again, don’t worry because this ugly duckling will soon be a swan.
9.) Contractor begins work on the home. This is where you see the transformation from ugly home into dream home. Depending on the scope of the work expect this process to take anywhere from a week to 6 months. Draws will be issued to pay the contractor throughout the process and for his completed work.
10.) Final draw and loan close-out — Appraiser reinspects the house to make sure it meets FHA 203K specifications and title is updated to reflect final close-out.
Now you have a custom home purchased at an amazing discount with thousands of dollars of built in equity from DAY ONE. How does it feel to have only put 3% down, but to own a home with 30% equity from the day you move in? I know for a fact that it feels great to accomplish a goal that could secure your future with minimal investment and minimal work. You could have let an investor do it for you, but instead you did it yourself and saved his mark-up. Congratulations, enjoy being the envy of the neighborhood.
Now get out there and find your ugly duckling!