First-time Fixer Upper

BY MICHELE LERNER

First-time homebuyers always face the down payment hurdle, but in a housing market with rapidly rising prices and limited inventory, they’re also challenged by heavy competition. One method of beating the competition is to look for a house that needs some work rather than a move-in ready property.

Generally, first-time buyers lack the skills or the time to take on projects, so they prefer a home that’s been rehabbed,” said Dawn Bricker, a Realtor ® with Century 21 Advantage Gold in Cherry Hill. “Unfortunately, they’re getting blocked from buying those homes by competition, especially from cash buyers.

Real estate agents can help first-time buyers see the potential in a less than perfect home, which may widen the possibilities to include ones that need work.

The key is to help first-time buyers avoid feeling overwhelmed by projects,” said Zach Lisella, a Realtor® with Coldwell Banker Realty in Allendale. “They need to realize not everything they want to do is crucial to do before or even after they move in. Agents can help them prioritize what needs to be done first, usually the kitchen or bathroom, and then have a five-year plan to take care of smaller projects down the line.

While not every house is a good fit for a first-time buyer, a house that needs work can provide an opportunity to live in the location they want, said Lisella.

You can change the interior of a house, but you can’t change a location,” Lisella says. “Agents can help buyers see they have a blank canvas and an opportunity to customize their home, which can be a huge benefit if they’re not finding what they want on the market.

Pitfalls and Benefits of Fixer-Uppers

To help your clients determine whether a fixer-upper could be a good choice, it’s important to ask them about their timeline for moving and their threshold for what’s livable, said Mischa Fisher, Chief Economist of HomeAdvisor in Denver.

If the buyers need to move in right away, they’ll need to determine their personal tolerance for living in a place that needs work,” said Fisher. “They need a plan about how to manage living there or a way to have the work done before they move.

If your buyers are open to a fixer-upper, it’s important to be honest about what the work entails, said Lisella.

There’s a fix for everything, but you need to be clear about what the fix is and how much it may cost,” said Lisella. “Your buyers may not want to take on a house with a structural crack or one in a flood hazard area.

Bricker said buyers should avoid buying properties that require a new septic system or that have knob-and-tube electrical systems that requires replacing.

I would definitely avoid taking on structural issues or an underground oil tank,” said Bricker. “They should ask the sellers to fix those things or at least bring in a structural engineer to evaluate the problem.

Naturally, buyers want to know how much projects will cost and whether they will get their money back. Resources such as HomeAdvisor’s True Cost Report or Remodeling Magazine’s Cost vs. Value Report can be valuable additions to your local market knowledge.

It’s important for buyers to know the risk when they set their budget and to have plenty of additional funds in case expenses go higher,” said Fisher. “A good home inspection is important, too, especially for things like mold.

While the pitfalls of taking on a house that needs work are evident, Lisella said buyers can benefit from the ability to customize their property through a renovation. For example, if they can’t find a house with the open floor plan they want, they may be able to remove walls to create the flow they want.

First-time buyers who purchase a fixer-upper and improve it can immediately build equity in their home,” said Bricker. “Right now, rehabbed houses are typically priced above their appraised price, so it may take time to gain more equity for buyers who purchase one in a bidding war compared to one they can add value to.

Price comparisons can be complicated between a home that has been renovated, one that needs some work, and one that needs a lot of work, said Fisher.

While a house that’s already been remodeled will save the buyers time, you can’t discount the value of location,” Fisher said. “The location of the property matters more than buying a move-in ready home. And all houses need some work, even if it’s just to change things to the way you want them.

Confidence and Contractors Required

Determining how much work they can handle can be difficult for inexperienced buyers.

Agents can help buyers be careful evaluating homes,” Fisher said. “The roof, electrical system, plumbing, heat and air conditioning must be reliable and can be expensive to fix. Everything else is cosmetic.

That doesn’t mean buyers should exclude homes that need major repairs, Fisher said, but they need to be realistic about the cost and understand that they need to hire a trustworthy professional to do the work.

Since first-time buyers typically lack experience maintaining or repairing a home, an objection to overcome is their fear they won’t be able to find a reliable contractor.

Most agents have a roster of contractors they know and trust,” said Bricker. “One of the biggest requests I see on Facebook pages are for contractors, so I also recommend people ask their local friends for the names of home improvement contractors.

Platforms such as HomeAdvisor, Thumbtack, Houzz and Porch can also be a resource for contractors.

Bricker suggests buyers have the work done before they move into their home to make it easier on themselves and the contractors, who can often do renovations more quickly if they don’t need to work around furniture and residents.

For buyers who want to do the projects, Lisella said agents should encourage them to only take on improvements that won’t cause a safety issue. Lisella reccomends homeowners call-in experts for projects that involve plumbing and electrical work.

Financing a Fixer-Upper

Some first-time buyers have cash to pay for renovations, particularly if they purchase a fixer-upper home for less than their budget. For others, a renovation loan wraps the cost of repairs into the purchase mortgage can be an excellent option.

Renovation loans can be great for first-time buyers because even if they don’t have a lot of experience there are plenty of people to help them along the way,” said Mark Greene, a mortgage loan originator with Homebridge Financial Services in Hackensack. “Buyers qualify for renovation loans just like any other loan, so they won’t get a loan unless they can afford the payments. They have to use licensed contractors for the projects.

Three renovation loan programs are available: FHA 203(k) loans, Fannie Mae HomeStyle Renovation loans and Veterans Affairs renovation loans.

There are nuances to all three loan programs, but the basis of the financing for all of them is that you’re financing the acquisition costs and home improvements in one loan,” said Greene. “The loan amount is based on the appraised value of the house and the estimated value of the property after the improvements are made.

If you qualify for a VA loan, they don’t require a down payment or mortgage insurance, but not all lenders offer VA renovation loans. Greene recommends a review of all three loan programs to see which is the best fit for the buyers and the property.

The HomeStyle loan requires a down payment of five percent and has the advantage of private mortgage insurance dropping off once the loan-to-value reaches 80 percent,” said Greene. “FHA loans are easier to qualify for, especially for borrowers with a lower credit score or a higher debt-to-income ratio. They only require a down payment of 3.5 percent, but the mortgage insurance must be paid for the entire loan.

FHA 203(k) loans include a streamlined option for less costly renovations up to $35,000. For more expensive projects, the standard FHA 203(k) loan doesn’t have a limit, but does require a HUD consultant to approve the project, an architect to draw up plans and a contractor to estimate the costs, said Greene.

It’s important to do your research and find an architect and a contractor ahead of time if possible to avoid slowing the process,” said Greene. “Agents should expect a closing of 60 days at least for a renovation loan.

Realtors® sometimes worry about a home in poor condition not passing inspection or not appraising, said Greene, but renovation loans don’t have issues like that since the work to bring them to code and improve their value is included in the financing.

Agents who are familiar with fixer-upper transactions can provide valuable support to buyers by identifying a worthwhile property, helping buyers visualize the potential in various homes, partnering with lenders with renovation experience and having a deep network of trustworthy contractors.

Tips for Agents to Share with First-Time Buyers

• Consult a lender with renovation loan experience.

• Be completely preapproved with full underwriting before making an offer.

• Interview several contractors before you search for homes and ask if they will provide estimates on a potential purchase.

• Opt for a home inspection for a professional evaluation about the home’s condition, even if the home is being sold as-is.

• Choose do-it-yourself projects you can realistically.

• Anticipate your renovation will take longer than expected.

• Budget for more than the estimate.

• Monitor work as its being done.