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RENOVATION FINANCING

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RENOVATION FINANCING Powered By Docstoc
					RENOVATION
FINANCING
             Presented By

     Richard Day
Renovation Mortgage Consultant
      4 Hour Con. Ed. - updated 8/2004
          What is a Renovation
          Loan?
$   A renovation loan allows a borrower to
    secure financing for both the purchase plus
    the cost of renovating a house…all in one
    loan, based on future value and condition.
$   A borrower can also refinance using this
    program, and even cash out, plus finance
    the cost of renovation…all in one loan,
    based on future value and condition.
            Renovation Trends
$ Remodeling market totaled $214 Billion in 2001, of which
  $165 Billion was owner improvements, maintenance and
  repair.
$ Of all home construction, including new and existing
  activity, nearly 50% is spent on existing homes.
$ Housing stock in the U.S. has more than tripled since 1940.
$ Average age of housing stock is currently 29 years.
$ Average square footage of new homes today is 2,130,
  compared to 1,740 for homes built between 1968.
$ Homeowners spend over 77% of the $214 Billion, compared
  to non-owner occupants (investors).
          Trends Continued
$ Trade-up buyers spend 21% more on home
  improvements than first time homebuyers (income
  bracket: 80K to 120K).
$ Expenditures on specific improvements from 2001
  data was (in billions): kitchens $14; baths $10.6.
$ Of all remodeling expenditures, over 70% are
  spent annually on projects exceeding $5,000, with
  the average being well above $20,000.
$ Return based on type of improvement (Nat. Avg.):
  bath 88%; kitchen 67%; master bedroom 75%;
  basement 79%.
         What is the market?
$ Build it and they will come
$ Fannie Mae predicted…
$ What are the needs of your buyers?
$ What trends are taking place today?
$ What are the benefits of you offering a value
  added service…for you?
$ You could be doing a renovation transaction on 1
  out of every ___ house you sell.
        Marketing Opportunities Using
        Renovation Financing

 As a Listing agent
 As a Selling agent
 Imagine your future book of business
 Value added service
 “Get the word about renovation financing”
 THE QUESTION TO ASK EVERY
  CUSTOMER IS…?
          THE QUESTION…

“In the next 6 to 12 months, do you have any plans or
  desires to perform any minor or major
  improvements, additions, or system upgrades to the
  property?”

If they answer yes, briefly change gears to learn a bit
   about what their true goals are.
        This is good for me
        because...
I  will sell more homes!
 As an expert I will increase referrals!
 I will help improve neighborhoods, increase
  property values!
 I can take on listings other agents will not!
 I will help homebuyers realize a dream they
  otherwise thought impossible!
        Transactions galore!!
REO properties
Auctions
Tax sales
Bank foreclosures
FSBooooo’s
FHA, VA, and Fannie/Freddie inventory
Estates
Your own inventory
       About the loan programs


History of the programs
How they can be used
Economic benefits
Different from other financing
Pre-consultation and pre-qualifying
Transaction types
         Eligible Properties

SFD residential
2, 3 or 4 unit properties
Mixed use properties (FHA only)
Modular homes
Manufactured (Mobile)
Most anything that can be turned into a home
          Possibilities are Endless!




S.P. $230,000
      +
R.F. $260,000
            Compare to Alternative
Alternative                          Renovation Loan
First loan                           Sales price:            $50,000
Sales price:               $50,000
                                     Renovation funds:       $50,000
Closing/prepaids/points:    $3,000
Total acquisition:         $53,000   Fees financed:           $1,500
Loan amount:               $45,000   Points & prepaids:       $2,500
Down payment:               $5,000   Total acquisition:     $104,000
Total cash required:        $8,000
                                     Loan amount:           $100,150
P & I payment:             $330.16
@ 8% 30 year fixed.                  Down payment:            $2,850
Second loan
Renovation funds:          $50,000
Closing/points:             $2,000
                                     Total cash required:     $6,350
Total cash required:        $2,000
P & I payment:             $537.00   *NOTE: Seller can contribute.
@10% 15 year fixed                   P & I payment:          $707.24
Both loans combined                  @ 7.5% 30 year fixed.
Total cash required:       $10,000
Total P & I payments:      $867.16
         Let’s do the Math
Acquisition cost simplified
Sales Price + Renovation funds = Acq. Cost
Maximum Loan to Value (of Acq. Cost)
FHA O.O. - 97.75% or 2.25% down
Conv. O.O. - 95% or 5% down
Conv. 2nd Home - 95% or 5% down
Conv. Investor - 90% or 10% down
  (with credit score above 700)
             FHA owner occupied
             purchase looks like…
 Sales price                          $100,000
 Renovation funds                     $50,000(incl. 10%)
 Acquisition costs                    $150,000
 Loan amount X (97.75)       =        $146,600
 Down payment                =        $3,375
 Closing costs (EST.)        =        $4,500
 Prepaids                    =        $2,484
 Discount points (EX - 0) =           $0
 TOTAL CASH TO CLOSE                  $10,359*
*Before seller contributions or 3rd party DAP’s.
             Conventional owner occupied
             purchase looks like…
 Sales price                          $100,000
 Renovation funds                     $50,000 (incl. 10%)
 Acquisition costs                    $150,000
 Loan amount X (95%)         =        $142,500
 Down payment                =        $7,500
 Closing costs (EST.)        =        $4,950
 Prepaids                    =        $2,484
 Discount points (EX 1.0) =           $1,425
 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 (incl. 10%)
   Acquisition costs            $150,000
   Loan amount X (90%)      =   $135,000
   Down payment             =   $15,000
   Closing costs (EST.)     =   $4,950
   Prepaids                 =   $2,484
   Discount points (EX 1.5) =   $2,025
   TOTAL CASH TO CLOSE          $24,459
             Conventional investor
             refinance looks like…
   Sales price                   =   $40,000
   Renovation funds(incl. 10%) =     $110,000
   After improved value          =   $200,000
   Loan amount X (80%)           =   $160,000
   Renovation funds              =   $110,000
   Closing/Prepaids/Points       =   $7,409
   Cash for sales price returned =   $40,000
   TOTAL CASH AT CLOSING             ($2,591) BACK
         Get Borrower Pre-qualified or
         Pre-approved
How  much do they make, owe, have...?
Cash required / Cash sources acceptable
Credit? Scoring
Qualifying ratios on each program
Automated underwriting
Consult with lender!!!
Pre-consult / pre-qualify...
        Consultation to Application
Inquiry
Loan Consultation
Commit to apply
Get all docs and application completed
NOTE: The process moves much faster if every credit
 document requested is supplied the first time
 around.
       5 Core Steps of a Renovation Loan

1. Application/Approval
2. The Work Write-Up
3. Appraisal
4. Project Management
5. Loan closes/Renovation begins
         Step 1. Apply for mortgage /
         get approved
 Take loan application supplying all necessary
  documentation
 Verifications, credit reports, all ordered just like
  other loans
 Pre-approval is allowed, recommended
 Loan submitted to underwriting for decision
 Approval with or without appraisal
          Step 2. Complete Work Write-up

Specification of Repairs document
Importance of the Work Write-up
Beware of other reports (certificates)
How to get it done - Consultant or
 Contractor/Borrower
This is not a home inspection, but…
Appraisal...cannot be ordered until the Work Write-
  up is finalized!
          Step 2. Cont…Work Write-Up

The final Work Write-Up should/may include:
  –   A summary of the report including names, fees,
      attachments, and consultant disclosure of role
  –   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 floor plan of the finished project (if applicable)
  –   Photos of current areas to be renovated (not
      required but helpful)
          Step 2. Cont...Work Write-up:
          Consultant or Contractor/Borrower?

 Consultant method
   One stop shopping
   Costs more ______, faster, approved 1st time
 Contractor/Borrower method
   Use Specification of Repairs
   Plan is then reviewed
   cheaper _____, slower, may not get approved first time
        Step 3. The Appraisal
 RMC    will order once the WWU is finalized
 Send order form, copy of contract, and copy
  of signed WWU
 Appraiser will envision the finished home
  as if all work were completed and appraise
  as such
 NOTE: THE APPRAISAL CAN NOT BE
  ORDERED WITHOUT THE WWU!
        Step 4. Project Management

Who is going to oversee the job and who is going
 to do the work?
How to decide
  Size of job
  Experience, tools, other resources…
  Time, materials and cash
What to look for
Explain financing to contractor!!!
        Step 4. Cont…Project management:
        using a General Contractor/s

Borrower selects own contractor/s
Documents required:
 “Homeowner /Contractor agreement”
 W-9
 Copy of contractors license
 Copy of insurance
Borrower can use one GC, or 2+ sub-contractors
           Step 4. Cont…
           Project Management: Self-help

When is it allowed?
Documents required
 • Self-help disclosure
 • Self-help qualification letter
 • Bids for big ticket items
Use common sense
         Step 5. Loan Closes/Renovation
         Begins

$ Closing agent selection
$ Closing takes place
$ 30 days to make first draw
$ Completion time
$ Final inspection
$ Extensions, hold back, lien releases
$ Contingency funds
           Step 5. Cont...Draw Process

$ When to make a draw
$ Call Fee Inspector (usually consultant)
$ Performs inspection per Work Write-Up
$ Draw request form - signed by all
$ Fax to draw center
$ Title update ordered
$ Funds disbursed
$ Should make draw at least every 30 days!
           Do the numbers make $ense?

$   What will it cost to renovate?
$   What will it be worth when completed?
$   Are there any incentives?
$   What should I pay (sales price)?
         Find a Property /
         Study the Numbers

Bearing in mind…qualifying, etc...
Property search options
Two major pieces of information needed
  Sources for general estimates
  Analyze market value
           Feasibility Study
Def: A brief summary report containing eyeball
    estimates of what is needed and a range of cost
    for those reports. A cliff notes version of the
    WWU.
 A borrowers scenario…
     Pre-contract
     Post-contract
    A Listing/seller scenario…
           Submit a Contract

   Similar to regular contract
   The “as-is” offer to the seller
   Points, on what?
   Seller concessions
   Settlement date
   Renovation contract addendum
     (See Renovation Mortgage Consultant)
         Sweat Equity:
         Conventional vs. FHA

Work Write-Up specifies who’s doing the work
Sweat equity
Consider time and resources
Funds borrowed for labor: Conv./FHA
Work done - passes inspection
Receipts supplied
Check disbursed
        Required/Eligible Renovations


Basic functional amenities
Amount of renovation allowed
  FHA
  Conventional
Eligible renovations
Luxury items?
Miscellaneous eligible
The 3 renovation limitations
         Special Features


 Finance mortgage payments
 Sweat equity, and market equity
 One loan, one low rate, tax deductible
 You have an ally
 Keep investments intact
 Mixed use properties
 No UFMIP on FHA 203K
 Tax credits and real estate tax abatements
           Investor benefits
   Lend up to 90% on 1 & 2 unit properties.
   Can finance up to six months mortgage
    payments.
   Lend 100% of the cost of renovation (after
    down payment towards sales price).
   Refinance properties already owned, that need
    renovation, both rate/term and “cash out”.
        Energy Efficiency Mortgage


History of program
Benefits
Rating process
H.E.R.S. report
Contractor bid
Escrow release
Renovation loan benefits
          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 flyers on your listing
 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…
         Can you find this deal?
 Buyer wants house - has little or no money.
 Fixer upper is for sale.
 The price is under the market, of course.
 Buyer offers price but with a seller concession to
  cover all cash to close.
 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 while using
    renovation lending to expand your market

				
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