IN FOCUS: Renovation Loans

Distressed home sales create opportunity for investors and traditional buyers

Dec 02, 2014
During the last few years, investors scooped up millions of cheap homes through foreclosures and short sales. Many transformed the properties to rentals, while others waited for the housing market to improve to sell the homes for a profit. The result is lower-priced homes that are left in less than pristine conditions. 
“You have tens of thousands of companies that snatch up cheap homes during the crisis and now these guys are marketing these homes,” said David Margulies, executive vice president of global sales at 5-Star Lender American Financial Resources (AFR). “In many cases, the homes have sat dormant. And, if you are able to get that home at a low price in a good location, with a 203k loan you can turn that home into a great one.”

Foreclosures sold for an average discount of 15% below market value in October; short sales for a 10% average discount, according to the National Association of Realtors.
The 203k loan program can help borrowers purchase or refinance home in need of some improvement. One of the biggest benefits of 203K loans is that borrowers can obtain a single loan at a long-term fixed or adjustable rate.
Another renovation loan program, the HomeStyle, will cover most of the same repairs as a 203K, but adds more flexibility for borrowers to make exterior changes and allows for luxury items like a new pools, spa or exterior kitchen. Many use the program to renovate their vacation homes or investment properties.
Sales of distressed homes can create a bargain for both investors and traditional home buyers. “The HomeStyle program can cater to investors by increasing their liquidity to renovate and resell,” said Damon Richardson, HomeStyle program specialist at AFR. “However, we have traditional buyers that can use the programs to renovate a home to their specifications and reflect their individual tastes.”
Although AFR is one of the largest 203K lenders in the country, their approach is very hands on and personal. “We care about the individual, and we want to make sure our brokers are representing and presenting that,” Richardson said. “It’s not something we ever marketed, but with every loan, we take that person’s name with their loan number, like Hogan4235, so we can always keep in mind that a person or family is at the end of all this.”
Increasing home values are also fueling the renovation loan market by helping to provide homeowners with more equity. According to a recent study by Zillow, average home values across the country are expected to exceed their pre-recession peaks by February 2018. During the past year, national average home values have gone up by 6.4%. That means a home purchased last year for $200,000 is now worth $212,800.
According to a Fitch Ratings forecast, home improvement spending will grow by 6% both this year and next thanks to gains in home prices and last year's rise in home sales. Published October 11, the firm's special report stated the home improvements product market grew from $289.7 billion in 2013 to reach $307.1 billion by the end of this year and possibly $325.5 billion by 2015.
Fitch based its forecast on a bevy of indicators, including the gains in this year's Remodeling Cost vs. Value report; the 4.8% year-over-year rise in existing home sales as of August; the roughly 3% rise in single-family housing starts compared with 2013; and easier bank lending standards.

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