It’s no secret that there are a lot of distressed properties on the market these days. These present a host of challenges to both real estate agents and buyers alike. Let’s take a look at the issues and how we might overcome them.
First of all, let’s clarify the definition of a distressed property. When I use that term, I’m referring to homes that are in need of repairs, deferred maintenance, or modernization in order to compete for the typical homebuyer. These homes can be owned by private parties, but more frequently they are bank-owned homes that have been acquired through the foreclosure process. In addition, many short-sale situations involved distressed properties as the owners don’t have the money to make the necessary improvements.
In all of these situations, the real estate agent that is listing the distressed property is faced with a dilemma: how can I attract buyers to this home? Because the property is not in good physical condition, there is a good chance that it won’t qualify for financing from FHA, VA, Fannie Mae, Freddie Mac, or any other loan program that exists today. In those situations, the best hope is to attract a cash buyer. However, the price of the home will need to be reduced significantly to induce a buyer to purchase the home.
Buyers in today’s market are still on the lookout for bargains, but because a growing percentage are first-time buyers (who typically have limited savings to purchase a home), most are looking for properties that don’t need a lot of work or costly repairs. That removes distressed properties from their list of potential homes.
Since there aren’t a lot of buyers running around with loads of cash in their pockets, distressed properties face a daunting future. However, there is a solution, and it’s been here the whole time. It’s the FHA 203(k) Streamline Rehab Loan, and it sets up perfectly to address the growing problem of distressed properties. Here’s how it works:
A prospective home buyer identifies a house that would be a suitable home but has deferred maintenance issues. The buyer obtains a bid to correct the work, and if desired, can have some elective upgrades included in the package of work to be performed. The amount of the rehab work is rolled into the purchase financing, so the buyer obtains one loan that includes the funds necessary to both purchase and improve the property. The buyer closes on the purchase, the work begins, and the buyer has a newly-remodeled home within 6 months of the closing date (it typically only takes 60 days, but the program allows a 6 month window to complete the work).
This program is designed for the first-time home buyer, although one doesn’t need to be a first-time buyer to qualify. A total of $35,000 can be financed into the final loan, which translates into roughly $30,000 of construction costs before contingency reserves are factored in. By allowing the rehab work to be completed after the buyer closes on the sale, the seller is removed from the expenses associated with the repairs. Both real estate agents are happy since they are able to receive their commissions for the sale, and the buyer can have his contractor perform the work.
As noted above, the buyer can actually have some non-essential work performed, too. For example, the inspection report may indicate that a new roof is needed. However, the buyers would also like to overhaul the kitchen. If the cost of the roof is $10,000, then there is another $20,000 that can be put towards the remodel of the kitchen. In some older homes, this could be the difference between making the sale and having prospective buyers walk away.
For more information on the 203(k) Streamline Rehab Loan, please feel free to contact me. I am fortunate to offer this program as a direct lender, which allows us to improve the processing efficiency of the program and speed up the loan approval process. I am optimistic that this loan program will be able to address the growing problem of distressed properties in our marketplace and provide a solution to non-financeable homes.
