How to buy a Portland “fixer” home.

Did you purchase a fixer, or do you want to?

In the first quarter of 2016, about 5.5% of all residential real estate sales were for homes that were either about to go into foreclosure (short sales) or had already been foreclosed on. That represents about 500 homes. Of course, many more homes, thousands, were sold this year in “fixer” status, often with decades of deferred maintenance.

What’s next for those Portland homeowners? The previous owners may have been behind on their mortgage payments for a number of years, meaning they probably didn’t have cash to spare for repainting the exterior, repairing the roof, or replacing cracked windows. Banks don’t do much maintenance either, so depending on how long the home sat on the market, foreclosed homes have almost always reached “fixer upper” status by the time a capable owner takes over.

What some might see as a challenge, others see as an opportunity to remodel the home to their liking. As a Portland real estate agent, buyers often ask me what options they have for purchasing a home that needs work. I tell them that in this competitive real estate market, it pays to get creative.

Of course, Portland home buyers interested in buying a fixer should always set aside a portion of their budget for maintenance and repairs, and expect higher energy costs when they first move into the home until they can get those improvements underway.

For major repairs, however, costs can add up to a significant portion of the total home value. For these situations, there’s another option — government-backed loans specifically marketed to homeowners who need to remodel, renovate, or even rebuild a home that has fallen into disrepair.

Single-Close Loans Save $$

Most homeowners are familiar with home equity lines of credit, which is how remodels are often financed. However, because they require that you already have a significant amount of equity into your home, they don’t typically work for first time home owners.

It may be tempting to buy the home with a traditional mortgage, then take out a loan through a private contractor, or a personal line of credit or credit card to finance the remodel. For smaller projects, this might be the easiest way to go, but be sure to read the fine print carefully, and include those extra closing costs in the total cost of the home!

For new homeowners who need to put a significant amount of money into the home they want to buy, there are two good Federal Housing Administration-backed loans: the FHA 203(k) loan or the Fannie Mae HomeStyle Renovation loan. They’re single-close options, meaning that they can be used both to purchase and restore the home. With everything taken care of under one loan, you minimize your closing fees.

FHA 203(k)

The 203(k) loan is actually a mortgage, insured and administered by the Federal Housing Administration, or FHA. Here are some of the highlights:

• Loan is offered long term at a fixed or adjustable rate, just like a conventional mortgage.
• The amount you can borrow is limited to 96.5% of the home after renovations are complete, or the cost of the home plus the cost of renovation, whichever is less.
• Single family homes as well as homes with multiple dwelling units are eligible, but not second homes or investment properties.
• Although they don’t care whether it’s a small improvement or you’re taking the home down to the foundation and starting over, FHA does limit what you can do with these loans. See the website for a complete list of allowed repairs.

Fannie Mae HomeStyle

Though this sounds like a breakfast item at the next trendy Portland diner, the HomeStyle® Renovation loan is actually a new-and-improved version of the 203(k) offered through the FHA lender Fannie Mae.

• The loan is offered as a 25- or 30-year fixed or adjustable rate mortgage
• Borrow up to 95% of the completed value of the home.
• Any type of renovation or repair is eligible, as long as it is permanently affixed to the property and adds value.
• You can use this loan not only for single family homes and homes with multiple dwelling units, but also for second homes and investment properties!

Plan Ahead to Stay in Budget

Which lending option you choose will be determined in large part by how extensive your home improvements will be.
It helps to know the lingo here. Generally, among home appraisers and real estate agents, a “remodel” is work that replaces existing fixtures or changes the structure. Think a kitchen remodel with new cabinetry and countertops.
Technically, “renovation” simply means doing surface improvements, like replacing doorknobs or repainting the interior. This word is often used interchangeably with the term “remodel”.
“Rebuilding” of course is taking the structure down to the 2x4s, or even the foundation, and starting again.

You can find average project costs online to give you some sense of what to expect. For example, Remodeling Magazine estimates the average cost of remodeling a mid-range kitchen to be more than $58,000 – but if you work with the right local contractor or do it yourself in Portland you might be able to build decent kitchen from scratch for only 15 to 30K.

Trying to negotiate a deal on a fixer home while looking down the road to what repairs and maintenance will need to be done can be overwhelming. That’s what it takes to get one of the FHA-backed renovation loans and keep closing costs down. If you have the right buyer’s agent, they can handle the negotiation side so that you can focus on getting all of your loan documentation together.

Take Another Look at the Portland Real Estate Market

Five years ago, foreclosures and short sales were a good option for people looking to buy a home in Portland on a budget. Today while the Portland real estate market is on an upswing and prices are high, this is a good way to buy strategically – buying low now so that if the market corrects itself in the future you are still in a good position.

That being said, I would advise Portland home buyers to not to give up on the conventional real estate market too quickly. Good deals do come up and a good real estate agent can guide you to them. Buying a Portland home that “needs work” can often be just as expensive as paying full price for a home that’s move-in ready. Of course, if you love that kind of project, go for it!