Nov. 1, 2008: Restoring a bargain-priced lender-owned home is easy -- if you have cash -- but a HUD 203k rehab loan makes it easy even if you don't
Last week we talked about troubled homes and how they can be restored to livability. That's fine if you're an investor with pockets full of cash. But what if you're an ordinary home-buyer? How can you pick up a bargain-priced home and then refurbish it to its former homey comfort?
If you're buying with an FHA loan, chances are the home is going to have to be at least partially restored before you can close on it. FHA loans require a more-rigorous appraisal, and any defects rendering the home uninhabitable will have to be corrected before you can proceed.
So if the range is missing from the kitchen, it will have to be replaced. If the water heater is broken, it will have to be repaired. If the pool is green, it will either have to be restored to swimmable condition or drained.
Who is responsible for these repairs? Normally, habitability issues would fall to the seller. But most foreclosure properties are sold "as-is" -- take it or leave it. If you have cash, you can pay for the repairs prior to close of escrow and then move in as planned.
But what if you don't have that kind of money?
One solution is to write your repair issues into your purchase contract. If the seller agrees to restore the pool and replace the range, you've dealt with the habitability problem in advance.
Another option is to take advantage of HUD's 203k rehabilitation program. With a 203k loan the loan underwriter can attach what amounts to a construction loan onto the primary purchase loan. So you could buy a lender-owned home for $100,000 and finance an additional $10,000 to refurbish the kitchen after close of escrow. The appraiser will assess the value the home will have after the improvements have been made.
As you might expect, the fine print is extensive, but for an FHA 203k loan in Phoenix your purchase price plus rehab costs can run as high as $362,000. At 3.5% down, that's an easy way into a nicely upgraded home.
Greg Swann is the designated broker for BloodhoundRealty.com, a full-service Metropolitan Phoenix real estate brokerage. This article originally appeared in the West Valley regional sections of the Arizona Republic.
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