Love a home's location but not the floor plan? Buy a house to renovate it. But be careful.
"Buyers will say, 'This is the best house in the location I really want,' but they know they will need to do some improvements to make the home what they want," says Bud Dietrich, an architect in New Port Richey, Florida.
Older homes are outdated
With U.S. government statistics showing the median age of an owner-occupied home was 37 years in 2011, up from 23 years old in 1985, lots of homes are outdated, with kitchens walled away from the family room, or small closets, says David Andreozzi, an architect in Barrington, Rhode Island.
A homebuyer who wants to remodel must tread carefully: Are the desired changes structurally possible? How much will it cost? Can the remodeling expense be financed?
Here, experts weigh in with answers.
Dream a little, plan a lot
Approach a buy-remodel with a carefully organized series of steps, advises John Pinto of Realty World-John V. Pinto & Associates in San Jose, California. "You have to storyboard the whole thing," he says.
Buyers typically have a "dream" -- knowing the location and type of home -- but they need specifics on the complexity, cost and feasibility of renovations, and how the financing will be arranged, all before making an offer on a home, he explains.
Dream-prone buyers probably have scouted out possible architects and builders whose work they admire, Dietrich says. Accelerate the buying process by letting favored architects and builders know that you will ask for quick estimates whenever promising listings pop up.
Estimate the price tag
All but deep-pocketed buyers will need a loan to both purchase and remodel.
With a mortgage preapproval, a lender examines a borrower's income and other factors to determine the maximum loan amount. The process is no different when the mortgage will include renovation money, explains Steve Marshall, renovation lending director for HomeBridge Financial Services.
An architect may charge an hourly fee to determine the cost and feasibility, Andreozzi says. If it's a simple project, it's quick to size up. "Other times the solution is much more complex and needs to be solved on the drawing board before you understand the implication on the budget," he says.
Careful estimates can come within 5 percent of the final figure, Andreozzi says.
It helps when price comes first
Detail ensures accuracy, agrees Tom Hawks, owner of Total Home Solution in Cedars, Pennsylvania. He likes to "work backwards," using the dollar amount for the remodel. Then the buyer chooses design and materials within the budget.
Figure the financing
Four government-backed loan programs are designed for purchase-remodelers. They are:
- FHA 203(k).
- Streamlined FHA 203(k).
- Fannie Mae HomeStyle Renovation mortgage.
- Fannie Mae HomePath mortgage.
Each program bases the loan amount on the value of the home after renovations are complete, Marshall explains.
Loans have guidelines
Sometimes, the cost or particulars of the project rule out certain loans: The HomePath and the streamlined 203(k) are restricted to renovations costing less than $35,000.
Loan limits are larger, but "the FHA 203(k) doesn't allow for 'luxury renovations,' like a pool, but FHA does allow for a detached garage, and not the HomeStyle," Marshall says.
Besides government loans, "It is very likely that a local, community bank will have their own loans based upon the (renovated) value of the property," says Ron Haynie, senior vice president of the Independent Community Bankers of America.
Lenders require periodic inspections, and money is disbursed in intervals after inspectors approve work, Haynie adds.
On your mark, get set, buy
Sellers aren't always cooperative when a potential buyer asks to have an architect or contractor inspect the property before making an offer.
Pinto adds that sellers aren't likely to entertain the renovation-buyer's offer seriously if it's "a brand-new listing with lots of interest." But when a listing lingers, it's easier, he says.
In fact, real estate agents are beginning to anticipate that buyers will want to update, says Mary Liebrock, an agent in Northbrook, Illinois. She says agents in the Chicago suburbs frequently ask sellers to find the blueprints for their homes to attach to listing sheets. Why? To give buyers information for updating floor plans.