I came across some interesting statistics relating to the Minneapolis Minnesota area, specifically the 55408 zip code. I am sure it relates something to many areas across the country. In April of 2009 the median price for a home in the 55408 zip code was around $ 217,000 and there were 53 homes for sale in that area according to Altos Research LLC. At that same time the average time on the market was 140-145 days.
Now fast forward to February of 2010. The median price for a home in the 55408 area code has risen to around $ 265,000, inventory has dropped to about 47 homes, but the time on the market now has increased to over 215 days! My guess is that there are a lot more "Fixer Uppers" now sitting on the market due to foreclosures. Banks, mortgage brokers, and Realtors are struggling to get these properties off the market due to financing difficulties.
So I asked myself a question. Is this because of the seasons in Minnesota? Winters can be a difficult time to move, or is it the banks trying to hold back inventory (foreclosures) to raise the values of the homes that are currently held on their books? There have been rumors that the inventory has been artificially kept low by the banks by not adding all the foreclosures to the market all at once. By doing this the banks are trying to use the laws of supply and demand to increase the sale prices of the homes in the area. In turn getting more for their foreclosures. I am going to make a prediction that within 6 months we will see inventory start to increase as the foreclosures come to market. Banks by withholding the inventory, have helped drive the prices up. Can you imagine what would have happened had all that inventory been dumped on the market back when the average price was around $ 215,000? Ugly! The banks will begin to trickle the foreclosure inventory back into the market place at the increased prices hoping to improve their balance sheets. The inventory will rise, the sale prices hopefully stay steady, the buyers will have more to choose from, but the big elephant in the room is still … HOW DO WE SELL THESE PROPERTIES?
I will give you the answer to this question. FHA 203K loans. I know as Realtors your thinking. I do not want to be a Realtor marketing these run down homes with all the FHA rules for financing. Here is the little known truth about these 203K loans however. The purchase and rehab of the property is done with one (1) loan. The buyer agreements to a price with the seller, the buyer has an HUD approved contractor come to the house and he tells them what needs to be made to make the home FHA compliant. Now here is the beauty of this program and something for you as a Realtor, marketing these homes, must know. The buyer can also add in additional, non-luxury items, to the work that is going to be done. Buyer does not like the carpet? Replace it. Kitchen counter tops and cabinets? Remodel it. The loan allows for things to be done to the house that will improve its value. One draw back though. You are not allowed to put in pools, hot tubs, movie theaters etc. I know, I know. Seems outrageous to me as well.
So you as the Realtor you put together your purchase agreement with the price agreed to with the seller. You note that this purchase will be an FHA 203K loan and you have everyone sign the purchase agreement like normal. Your mortgage professional will then put together the financing that will include the cost of the rehab as well as the purchase.
Wait though, there is one other HUGE benefit to the buyers and sellers here. When the appraisal is done on the house for the purchase. The appraiser provides two values on the property. The value its worth now and the value after the rehab. Now here is the good part. The value after the rehab is increased by 10% for this program.
Here is an example.
Sale Price: $ 175,000
Repairs: $ 30,000
10% Contingency: $ 3,000
Fees 203K: (varies) $ 620
Total Cost: $ 208,620
3.5% down: $ 7,301.70
Base Loan Amount without MI: $ 201,318.30
Upfront Mortgage Insurance @ 1.75%: $ 3,523.07
Total Loan Amount: $ 204,841.00
Appraised Value after rehab: $ 200,000 multiplied by the maximum loan to value of 96.5% gives you the maximum loan amount $ 193,000. OUCH, that is a difference of $ 11,841.00. Now here is where the largest benefit comes in. Remember I said the appraised value after the rehab is increased by 10%? Well that would give us a value of $ 220,000 to use for financing. Multiply that by 96.5% and you get a maximum loan amount now of $ 212,300. We can now do the financing and this deal can get done.
Hope this helps you guys look at some of these fixer uppers in a difference light. Good luck selling.
For more information you can visit the HUD website at http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm