RENOVATIONRENOVATIONFINANCINGFINANCING

Presented By

Richard DayRenovation Mortgage Consultant

4 Hour Con. Ed. - updated 8/2004

What is a Renovation What is a Renovation Loan?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 TrendsRenovation 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 ContinuedTrends 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? 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 Marketing Opportunities Using Renovation FinancingRenovation 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…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 This is good for me because...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!!Transactions galore!!

REO properties Auctions Tax sales Bank foreclosures FSBooooo’s FHA, VA, and Fannie/Freddie inventory Estates Your own inventory

About the loan programsAbout 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 PropertiesEligible 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

S.P. $10,00

0

+R.F.

$160,0

00

S.P. $160,000 +R.F. $8,500

S.P. $85,000

+

R.F. $27,500

S.P. $45,000

+

R.F. $11,000

S.P.

$50,000

+

R.F.

$50,000

S.P. $230,000

+

R.F. $260,000

Possibilities are Endless! Possibilities are Endless!

Alternative

First loan

Sales price: $50,000

Closing/prepaids/points: $3,000

Total acquisition: $53,000

Loan amount: $45,000

Down payment: $5,000

Total cash required: $8,000

P & I payment: $330.16

@ 8% 30 year fixed.

Second loan

Renovation funds: $50,000

Closing/points: $2,000

Total cash required: $2,000

P & I payment: $537.00

@10% 15 year fixed

Both loans combinedBoth loans combined

Total cash required: $10,000Total cash required: $10,000

Total P & I payments: $867.16Total P & I payments: $867.16

Renovation Loan

Sales price: $50,000

Renovation funds: $50,000

Fees financed: $1,500

Points & prepaids: $2,500

Total acquisition: $104,000

Loan amount: $100,150

Down payment: $2,850

Total cash required: $6,350Total cash required: $6,350

*NOTE: Seller can contribute.

P & I payment:P & I payment: $707.24 $707.24

@ 7.5% 30 year fixed.

Compare to AlternativeCompare to Alternative

Let’s do the MathLet’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 FHA owner occupied purchase looks like…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 Conventional owner occupied purchase looks like…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 Conventional investor purchase looks like…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 Conventional investor refinance looks like…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 Get Borrower Pre-qualified or Pre-approvedPre-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 ApplicationConsultation 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 Loan5 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 / Step 1. Apply for mortgage / get approvedget 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 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-UpStep 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: Step 2. Cont...Work Write-up: Consultant or Consultant or Contractor/Borrower?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 AppraisalStep 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 ManagementStep 4. Project Management

Who is going to oversee the job and who is going to do the work?

How to decideSize of jobExperience, tools, other resources…Time, materials and cash

What to look for Explain financing to contractor!!!

Step 4. Cont…Project management: Step 4. Cont…Project management: using a General Contractor/susing a General Contractor/s

Borrower selects own contractor/s Documents required:

“Homeowner /Contractor agreement”W-9Copy of contractors licenseCopy of insurance

Borrower can use one GC, or 2+ sub-contractors

Step 4. Cont…Step 4. Cont…Project Management: Self-help 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 Step 5. Loan Closes/Renovation BeginsBegins

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 ProcessStep 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? 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 / Find a Property / Study the NumbersStudy the Numbers

Bearing in mind…qualifying, etc... Property search options Two major pieces of information needed

Sources for general estimates Analyze market value

Feasibility StudyFeasibility 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 ContractSubmit 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: Sweat Equity: Conventional vs. FHAConventional 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 Required/Eligible Renovations

Basic functional amenities Amount of renovation allowed

FHA Conventional

Eligible renovations Luxury items? Miscellaneous eligible The 3 renovation limitations

Special FeaturesSpecial 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 benefitsInvestor 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 MortgageEnergy 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 Marketing Ideas to Help You Sell More HomesMore 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? 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 UpLets 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