FHA rehab loans ideal for distressed homes

Rolling purchase price, fix-up costs into 1 loan is next best thing to new construction

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jun. 22, 2012

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Rolling purchase price, fix-up costs into 1 loan is next best thing to new construction

Steve Bergsman
Inman News®

Foreclosures and short sales always look so enticing, but these kinds of deals are not for the faint-hearted or those on slim resources.

Buying a residence that is not newly built usually requires immediate rehabilitation and remodeling to be followed by regular maintenance. Taking on a foreclosure or short-sale property only ratchets up the process with more intensive rehabbing and certainly a lot more maintenance.

However, one of the most overlooked FHA programs, the 203(k) loan, can help with all those problems if you want to take on the burden of the foreclosure investment.

I bring all this up because I wanted to discuss the 203(k) loan program, which is an underappreciated FHA opportunity that can combine purchase price and fix-up costs into one mortgage, and, secondly, because there have been increasing discussions about the virtues of buying a new home instead of a cheaper property where the mortgage is busted.

I'll address the latter issue first.

Just like the purchase of a new car instead of used one, many prefer to buy a new home because it comes with all the modern bells and whistles and since everything is brand-new; as a homeowner, one shouldn't have to deal with structural and systematic breakdowns.

Recently, the National Association of Home Builders pulled some data from the 2009 (most recent) American Housing Survey, a joint production of the U.S. Census Bureau and the Department of Housing and Urban Development (HUD), to see how frequently maintenance was required in a new home (four years old or younger) versus an older property.

Its conclusions: 26 percent of all homeowners spend $100 or more a month on various upkeep costs; only 11 percent of owners of newly constructed homes spend this amount. In addition, 73 percent of new homeowners spend less than $25 a month on routine maintenance costs.

The same holds true for energy expenses, NAHB reported. On a median-square-foot basis, homeowners spend 78 cents per square foot per year on electricity. Owners of new homes spend 65 cents per square foot per year. For homes with piped gas, homeowners spend on average 53 cents per square foot per year; owners of new homes spend 38 cents per square foot per year.

"The message is, when you compare the average new-home price to the average existing-home price, new homes are more expensive, but when you consider additional, incremental costs, you are getting additional value," said Robert Dietz, an economist at the NAHB. "Obviously, the new home is going to be in superior condition, which means less expenses in the early years."

Although the numbers from the 2009 American Housing Survey are getting a little ripe, Dietz doesn't foresee a big change when the next survey appears. If anything, he said the gap should be wider because homes are much more energy and maintenance efficient; meanwhile, the cost of energy and maintenance has only increased.

"When you hear someone say, 'Hey, I got a short sale and the price is good,' the economist in me would respond, 'There's no free lunch,'" Dietz said. "It is going to require some effort and dollars to bring that home up to the standard the homeowner wants. In new construction, you get that standard in day one."

Still, buyers of short sales and foreclosed homes seem to know what they are doing, and really, really want to purchase existing residences at what they consider bargain prices. They know there will be some fix-up costs, and if they're smart they'll be aware of one of the better FHA programs, the 203(k) loan.

I checked in with Brian Robison, a principal with Summit Design Build LLC, an Atlanta contractor and renovation specialist company, who works the 203(k) loan market in his area.

"A lot of people don't know about this loan; it's really a tight-lipped kind of thing," he said. "A lot of Realtors when I call to them about (the) 203(k) loan, they say, 'What is that?' Everyone is selling foreclosures, but they don't know what the 203(k) loan is."

That's unfortunate, because it is a great selling point.

Just a few notes from the FHA 203(k) loan website:

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