By Carole Hawkins, [email protected]
Laurie Jarvis grew up in Orange Park, but as a child she patronized a hair salon in Avondale. That was when she fell in love with the idea of living in a historic district.
As an adult and first-time homebuyer, the property that best fit Jarvis’ dream and pocketbook was in Springfield — and it was completely gutted.
A deal breaker for financing? It turned out not to be.
Her Realtor packaged the home as a rehab deal, and steered Jarvis toward inspectors, contractors and insurance agents who were familiar with renovations.
The cornerstone of the package was a renovation mortgage — a loan that rolls the cost of the house and its repairs into one mortgage. Jarvis was allowed to borrow based on what the house was expected to be worth after the rehab was completed.
“It’s brilliant,” Jarvis said. “It gives us the opportunity to revitalize something that’s old and beautiful. Without it, we probably would have had to go toward a more traditional type of home.”
Cornerstone of the rehab deal is the mortgage
Renovation loans have been around for decades. But when the mortgage crisis caused so many homes to fall into foreclosure and disrepair, they got more popular.
In 2007, there were only seven FHA renovation mortgages issued in Northeast Florida, said Jamie Zeitz of HomeBridge Financial Services. Last year, Zeitz’ office alone wrote 350 renovation loans.
“There are a lot of distressed properties out there. Homes have to meet minimum conditions in order to get financing,” said Zeitz. “This is an easy vehicle to deal with that.”
Roof repairs, for example, would normally disqualify a home. But, a renovation loan will close, even if major structural work is needed. An appraiser estimates the after-repair value, and the buyer is required by contract to perform the work, usually within six months.
That provides opportunities for homebuyers, especially those at the entry level.
A path for first-time homebuyers
The housing crisis created a dearth of inventory for first-time home buyers, even though hundreds of homes were on the market, said Christine Simmons, an agent for Re/Max in Orange Park.
Homes in the $100,000 to $160,000 price range were overwhelmingly foreclosures and short sales. Most had deficiencies — a bad roof, worn-out HVAC or an outdated electrical panel — that disqualified them from financing. Neither the sellers nor the buyers had money to fix the problems.
“The buyers couldn’t get the financing and investors were snapping up properties for cash at steals,” Simmons said.
Simmons four years ago took training for renovation lending. It leveled the playing field for her buyers. Almost every customer she works with now is a candidate for a renovation loan, she said.
“It was a game-changer,” Simmons said. “The money is so cheap to borrow that it doesn’t make sense to take it out of your pocket. As long as the house appraises for the renovation you’re doing, you can put it in the mortgage.”
Not just for distressed property
The type of renovation loan most Realtors know is the FHA 203K loan.
With a 3.5 percent down payment, loans are geared toward first-time homebuyers. But, there are some limits.
The home must be owner-occupied, mortgages are capped at $625,000.
There’s another line of mortgages that roll repairs into conventional loans, Zeitz said.
These mortgages can be used to purchase more expensive homes and to perform upgrades, not just repairs. It’s a way to update or personalize a house for a buyer.
For example, Zeitz recently closed a loan with a buyer who wanted to add a pool to a house that was new construction.
“Builders don’t really want to put a pool in, because it adds risk and cost,” Zeitz said. “This way, a homebuyer can put the pool in by simply using the right version of the loan.”
Zeitz said conventional renovation loans are popular at the Beaches and in older neighborhoods.
“A lot of the homes there need updating and the value of the dirt beneath the property is high.”
A way to rebuild historic districts
Historic districts are another place where renovation deals make sense. When used there, they have the potential to rebuild whole neighborhoods.
Many historic homes need extensive work to be livable said Amanda Searle of Magnolia Properties. Searle, who lives in Springfield and has renovated several homes herself, specializes in selling historic homes.
“A lot of people see HGTV shows and they think, ‘Oh I’m going to buy a shell house and I’m going to renovate it,’” she said. “They don’t understand that you can’t buy a house for $30,000 and work on it over time. A lender won’t agree to that.”
A shell home might sell for $30,000, Searle said. But it typically needs $100,000 or $150,000 in repairs. Without a renovation loan, the only people who could buy the properties would be investors with access to cash.
Finding the perfect fit
That would lock someone like Jarvis out of the rehab market.
Instead, her family today is planning on restoring the 1906 home to its original look on the outside. They’ll keep its old staircase, fireplace and mantle while adding some modern touches like granite countertops, new cabinets, tile floors and a huge walk-in shower.
“It’s got history, even if you don’t know it yet,” Jarvis said. “I love the character and the craftsmanship. You don’t get that in a modern house.”
Also, it’s in a neighborhood that is a perfect fit for her family.
“I’ve always loved Springfield,” Jarvis said. “They have a sense of community about them that you can’t find anywhere.
“That being said, all of the houses out there do need some love.”