Learning Center
Plans & pricing Sign in
Sign Out

Renovation Financing


									Renovation Financing

Renovation Financing

        The Win, Win, Win Scenario
                Presented By Lisa Marra
                       The Marra Mortgage Group

   What is a Renovation Loan?
•  A renovation loan allows a borrower to secure
   financing for both the purchase plus the costs
   associated to renovating a house…all in one
   loan, based on future value and condition.
•  A borrower can also refinance a current property
   using this program, plus finance the cost of
   renovation…all in one loan, based on future
   value and condition.

                 Special Features

•  Finance mortgage payments
•  One loan, one low rate, tax deductible
•  Three additional set of eyes – Per project
•  Keep investments intact
•  Mixed use properties
•  Tax credits and real estate tax abatements

       Remodeling Facts & Figures
•  Remodeling market totaled Over $300 Billion in 2009.

•  This is equal to more than 2% of the total U.S. economy.

•  Many homes built before the 1970 Oil Embargo, use as
   much as 30 percent more energy than newer homes.

•  Homeowners spend over 75% of renovation expenditures
   compared to non-owner occupants (investors).

 Remodeling Facts & Figures
     Expenditures by category

     •    Additions/Alterations - $75 Billion

     •    New Systems (HVAC, Plumbing, Electrical) - $17 Billion

     •    Kitchens - $14 Billion

     •    Baths - $9 Billion

Remodeling Facts & Figures
  Summary of the $300 Billion

    $115 Billion spent on NEW improvements

    $185 Billion spent on REPAIRS !
       Repairs for deferred maintenance on roofs, plumbing,
        electrical, HVAC, windows and mold

        Transactions Galore!!
•  REO and Short Sale Properties

•  Bank Foreclosures

•  Tax Sales

•  FSBooo’s

•  Estate Sales

     Using Renovation Financing
      to Facilitate the Short Sale
•  Deferred maintenance, caused by sellers hardship, can lead to
   challenged property conditions
    •  Renovation Financing allows you to sell the
       property “as-is”
•  The sellers lender is unlikely to make repairs
    •  Renovation Financing allows you to sell the
       property “as-is”
•  The potential buyers are put off by the property condition
    •  Renovation Financing allows you to sell the
       property “as it will be!”

      Renovation Financing
  Keeps you from Never losing
       a short sale closing
because of the property condition!

              Listing Agents
How to Market a property in “As-Is” condition
 •  Within your MLS listings, use the term, “This property is renovation
    financing approved!”

 •  Develop a relationship with several local contractors and have cost
    estimates and renovation financing flyers in the home

 •  Use renovation financing signs and banners

 •  Market the property based on future value and potential!

               Selling Agents
  How to Sell a property in “As-Is” condition
•  Discuss FUTURE property condition and amenities

•  Discuss future property value

•  Discuss the potential of turning the property into their dream home

•  Discuss the things that can be done as soon as closing is completed
    –  New cabinets, new carpet, new painting, new baths, new deck, new basement – Give
       them their dreams of tomorrow –TODAY!

        About the loan programs

•  History of the programs
  •  1962 FHA – 1994 Fannie – 1995 Freddie –
  •  2005 FHA Streamline

•  Economic benefits for entire community

FHA vs. Conventional Renovation

           FHA                       Conventional

                              –  Owner Occupied
–  Owner Occupied ONLY        –  2nd Homes
                              –  Investor
–  Less stringent on credit
   qualifications             –  Stricter credit guidelines
–  One closing                –  One closing

       Required vs. Eligible Repair Items
•  All health, safety and energy conservation items must be addressed
   prior to completing general home improvements.

•  On 203K loans, the work write-up (if applicable) and appraisal must
   demonstrate that, when the rehabilitation is completed, the property
   will meet HUD’s minimum property standards.

•  The program can then be used to finance items such as, painting,
   room additions, decks and other items, even if the home does not
   need any other improvements.

   Examples of Eligible 203k Repairs
•  Structural alterations and reconstruction (repair or replacement of
   structural damage, chimney repair, additions to the structure, installation
   of an additional bath(s), skylights, finished attics and/or basements, repair
   of termite damage and the treatment against termites or other insect
•  Changes for improved functions and modernization (remodeled
   bathrooms and kitchens, including permanently installed appliances; such
   as, built-in range and/or oven, range hood, microwave, dishwasher)
•  Changes for aesthetic appeal and elimination of obsolescence (new
   exterior siding, adding a second story to the home, covered porch, stair
   railings, attached carport)
•  Reconditioning or replacement of plumbing (including connection to public
   water and/or sewer systems), heating, air conditioning and electrical

         Examples of Ineligible 203k Repairs
•  Luxury items and improvements that do not become a permanent
   part of the real property are not eligible. Ineligible improvements for
   purchase or repair include, but are not limited to, the following:
    •    • Barbecue pit
    •    • Bathhouse
    •    • Dumbwaiter
    •    • Exterior hot tub, sauna, spa and whirlpool bath
    •    • Outdoor fireplace or hearth
    •    • Photo mural
    •    • Installation of a new swimming pool
    •    • Gazebo, television antenna, satellite dish
    •    • Tennis court
    •    • Tree surgery (unless a health and safety requirement)
    •    • Additions or alterations to provide for commercial use

                   Repair Review

•    Basic functional amenities
•    Eligible renovations
•    Luxury items
•    Miscellaneous eligible

               Eligible Properties
• Single family detached or attached dwellings
• Two to four unit properties
• Storefront properties (mixed use)
• Low rise Condominiums*
   *(Agency approval required & maximum of 4 stories and
   maximum of 4 units per building)
• Townhouse
• Manufactured 2 (Leasehold properties not allowed)
• Planned Unit Development

              Eligible Properties
•  Homes that have been demolished or will be razed
   as part of the rehabilitation are acceptable provided
   the existing foundation system is not affected and
   will still be used.

•  An existing piece of the original foundation
   must be in place.

       Eligible Properties


         HISTORIC or OLD!


Alternative Financing vs FHA 203k

Maximum Renovation Financing
    Sales Price + Renovation funds = Acquisition Cost

•  Maximum Loan to Value (LTV) is based on Acquisition Cost

   •  Max LTV for FHA = 96.50% (A 3.5% down payment)
   •  Max LTV for Conventional Owner Occupied = 95% ( A 5% down payment)
   •  Max LTV for Conventional 2nd Home = 90% (A 10% down payment)
       •  Need a 720 Credit Score
   •  Max LTV for Conventional Investor = 80% (A 20% down payment)
       •  Need a 680 Credit Score + Desktop Approval

FHA 203k Purchase looks like…
    Sales price                 =       $100,000
    Renovation funds            =       $ 50,000
    Acquisition Cost            =       $150,000
    Loan amount X 96.50         =       $144,750
    Down payment                =       $ 5,250
    Closing costs (EST.)        =       $ 4,500
    Prepaids                    =       $ 2,484

  TOTAL CASH TO CLOSE           =       $12,234*

*Before seller contributions and/or 3rd party DAP’s.

       Conventional Owner Occupied
          Purchase looks like…
    Sales price                  =        $100,000
    Renovation funds             =        $ 50,000
    Acquisition Cost             =        $150,000
    Loan amount X 95%            =        $142,500
    Down payment                 =        $ 7,500
    Closing costs (EST.)         =        $ 4,950
    Prepaids                     =        $ 2,484

                TOTAL CASH TO CLOSE                $16,359*
              *Before seller contributions or 3rd party DAP’s.

     Conventional Investor Purchase
              looks like…
    Sales price            =       $100,000
    Renovation funds       =       $ 50,000
    Acquisition Cost       =       $150,000
    Loan amount X 80%      =       $120,000
    Down payment           =       $ 30,000
    Closing costs (EST.)   =       $ 4,950
    Prepaids               =       $ 2,484

             TOTAL CASH TO CLOSE       =      $39,459

           The 5 Core Steps
   For a Successful Renovation Loan
1. Application / Approval
2. Feasibility Study / The Work Write-Up
3. Appraisal / After Repair Value
4. Project Management
5. Loan Closes / Renovation Begins

                             Step 1
                      Application / Approval
•    Consult with a Lender – Be sure the lender can handle renovation
     loans and open communications exist with proper expectations
•    Lender to;
     •    Confirm buyers income (Get paystubs, W-2’s and tax returns)
     •    Confirm buyers available cash (Get asset statements)
     •    Confirm buyers credit and credit scores (Review 3 bureau credit
•    Lender to;
     •  Determine buyers qualification
     •  Set proper expectations for borrowers regarding maximum
        mortgage payment
     •  Set proper expectations for cash needed to purchase

                Step 1(Continued)
        Get Borrower FULLY Pre-Approved
•  Lender to completely process credit application
    •  Verifications, credit reports, all ordered just like any other loan.

•  Loan Submitted to Underwriting

•  Loan Commitment Issued – Subject to property conditions ONLY

•  You now have an approved buyer.

  This allows you the ability to effectively manage and
  facilitate an approval with the short sale negotiator !

                         Step 2
         Feasibility Study / The Work Write-Up
A Feasibility Study is similar to a home inspection. It is a cliff notes version
     of the Work Write-Up (WWU). It contains an eyeball cost estimate of
     what is needed to bring the property to minimum standards. The
     purpose of a feasibility study is to confirm the anticipated repair costs.
         Scenario #1 – The borrower is approved for a maximum of $50,000 in
          repair costs. During the feasibility study the HUD consultant confirms the
          repairs can be completed within that price range and the project moves
          forward with a full work write-up
         Scenario #2 – The borrower is approved for a maximum of $50,000 in
          repair costs. During the feasibility study the HUD consultant confirms the
          repairs can be completed within that price range, however a crack in the
          foundation is found and the HUD consultant advises the buyer that it will
          take an additional $20,000 in repairs. The buyer either;
             A – Gets a reduction in the sales price to cover the additional repair costs
             B – Requests a release from the contract and finds another house

                  Step 2 (Continued)
        Feasibility Study / The Work Write-Up
A Work Write Up is a full report that details all the work to be performed on the
     property. It contains both a detailed written narrative of the expected work to
     be completed, as well as an estimate of costs. It is broken down into 35
     distinct areas that includes, but is not limited to the; Foundation, roof, siding,
     plumbing, electrical, windows, doors, floors, tile, bath, cabinetry, appliances,
     basement, cleanup……

             The work write up also includes a contractors bid. This is the entire report, only with the
              cost estimates left blank.
             This allows the borrowers to compare contractors from a position of knowledge

               Step 2 (Continued)
     Feasibility Study / The Work Write-Up
           The final Work Write-Up should include:
–    A summary of the report including names, fees, attachments, and
     consultant disclosure of their role in the process

–    A narrative overview of the project

–    The line items including cost of labor, cost of materials, and
     description of work to be completed (in detail)

–    A blank contractors bid

–    A floor plan of the finished project (if applicable)

–    Photos of current areas to be renovated (not required but helpful)

                  Step 2 (Continued)
        Feasibility Study / The Work Write-Up
 Use a HUD consultant or go directly to the contractor?
•  Consultants Work Write-up:
   •  Initial cost is a bit more money
   •  The blank contractor bid alone could save more money then initial
        cost of the work write up
   •    Consultant acts like a project manager ( one more set of eyes)
         •  The consultant keeps the contractor in line and on time
•  Contractor Bids: (Streamline Only – Scope of work <$35,000
   •  Initial cost is less
   •  Best Practice is to always involve a HUD consultant

                        Step 3
            Appraisal / After Repair Value

•  Appraisal is Ordered once the 1st draft of WWU is completed or if
   borrower has elected to use a streamline 203k, a complete
   contractors bid is completed.

•  Appraiser will envision the finished home as if all work were
   completed and appraise as such. This is the After Repaired Value

                        Step 3
            Appraisal / After Repair Value
       Possible Outcomes of the ARV Appraisal

•  Scenario # 1 – The property appraises just fine to be able to include
   all repairs – Buyer finds contractor to compete work within the set
   budget and loan moves towards closing

•  Scenario #2 – The property doesn’t appraise for amount needed to
   cover necessary repairs. The HUD consultant works with the
   borrowers, agents and contractors to help facilitate a positive

                               Step 4
                        Project Management
                    Who is going to oversee the job?
•  How to decide between using a HUD consultant or going directly to the
       •    Loan Type – Is it conventional or 203k?
       •    Size of job – Is the scope of work greater then $35,000?
       •    Does the renovation involve any structural issues?
       •    Time

                   Step 4 (Continued)
                  Project Management

•  Borrower selects own contractor/s
•  Loan Officer Explains financing to contractor!!!
   •  Documents required: State by state requirements
       •  “Homeowner /Contractor agreement”
       •  Signed W-9 form
       •  Copy of contractors license
       •  Completed Contractor Statement form
       •  Signed Notice to Contractor
       •  Contractor must meet their state insurance requirements

                       Step 5
           Loan Closes / Renovation Begins
•  Two Weeks to make first draw
   •  File must be set up in draw department and confirmation of
        contractor is completed one last time with borrower
•  Completion time is estimate prior to closing
    •  Depending on scope of work can go out as much as 6 months
•  Extensions and Hold Back
    •  Extensions to complete work can be granted on a case by case
   •    A 10% hold back on each draw is held back

                       Step 5 (Continued)
           Loan Closes / Renovation Begins
•  Final inspection & Lien Releases
    •  Once all work is completed a final inspection is completed along
         with an updated title report to confirm no mechanics liens. Once
         cleared funds are released
•    Contingency Funds
      •  Most loans will have a 10% or greater, Contingency Reserve
           •  This is considered the “Oops” money in case an unexpected
              expense occurs during renovation – With the HUD
              consultants clearance these funds are made available to
              correct unforeseen problems.
           •  Any funds not used during the construction period are
              applied to the mortgage as a principle curtailment.

          Investor Benefits
•  Lend up to 80% on 1 & 2 unit properties.
•  Can finance up to six months mortgage
•  Refinance properties already owned, that
   need renovation.

            Marketing Ideas to Help You
                Sell More Homes
•    Yard signs (before and after the sale)
•    Open house flyers and good faith scenarios
•    Feasibility studies from consultant
•    Before and after photo albums
•    Table tent narratives during open house
•    Networking opportunities with other professionals
•    Homebuyer education workshops on renovation
•    Business plan for R.E.O. properties
•    And so much more…

 This is good for you because...
•  I can list & sell more homes!
•  As an expert I will increase referrals!
•  I will help improve neighborhoods, increase property
•  I can take on listings other agents may not!
•  I will help homebuyers realize a dream they did not know
   was possible!

                  Can you find this deal?
•  Buyer wants house - has little or no money.

•  Fixer upper is for sale.

•  The price is right.

•  Buyer offers price but with a seller concession to cover all cash to

•  Seller, buyer and Realtor win, by creating a deal using built in equity
   and renovation lending.

•  Lender lends all funds for purchase and renovation in one loan.

                 Lets Sum It All Up
•  Unknown opportunity for borrowers/buyers

•  Ability to increase value added service and referrals

•  Become an expert on the program

•  Save neighborhoods, stabilize/increase value

•  Know the steps…get borrower pre-counseled and pre-approved

•  Make more money for yourself by using renovation lending to
   expand your market


To top