RENOVATION FINANCING

1. RENOVATIONFINANCING Presented By Richard Day Renovation Mortgage Consultant 4 Hour Con. Ed. - updated 8/2004

2. What is a Renovation Loan? • A renovation loan allows a borrower to secure financing for both the purchase plus the cost of renovating a house…all in one loan, based on future value and condition. • A borrower can also refinance using this program, and even cash out, plus finance the cost of renovation…all in one loan, based on future value and condition.

3. Renovation Trends • Remodeling market totaled $214 Billion in 2001, of which $165 Billion was owner improvements, maintenance and repair. • Of all home construction, including new and existing activity, nearly 50% is spent on existing homes. • Housing stock in the U.S. has more than tripled since 1940. • Average age of housing stock is currently 29 years. • Average square footage of new homes today is 2,130, compared to 1,740 for homes built between 1968. • Homeowners spend over 77% of the $214 Billion, compared to non-owner occupants (investors).

4. Trends Continued • Trade-up buyers spend 21% more on home improvements than first time homebuyers (income bracket: 80K to 120K). • Expenditures on specific improvements from 2001 data was (in billions): kitchens $14; baths $10.6. • Of all remodeling expenditures, over 70% are spent annually on projects exceeding $5,000, with the average being well above $20,000. • Return based on type of improvement (Nat. Avg.): bath 88%; kitchen 67%; master bedroom 75%; basement 79%.

5. What is the market? • Build it and they will come • Fannie Mae predicted… • What are the needs of your buyers? • What trends are taking place today? • What are the benefits of you offering a value added service…for you? • You could be doing a renovation transaction on 1 out of every ___ house you sell.

6. Marketing Opportunities Using Renovation Financing • As a Listing agent • As a Selling agent • Imagine your future book of business • Value added service • “Get the word about renovation financing” • THE QUESTION TO ASK EVERY CUSTOMER IS…?

7. THE QUESTION… “In the next 6 to 12 months, do you have any plans or desires to perform any minor or major improvements, additions, or system upgrades to the property?” If they answer yes, briefly change gears to learn a bit about what their true goals are.

8. This is good for me because... • I will sell more homes! • As an expert I will increase referrals! • I will help improve neighborhoods, increase property values! • I can take on listings other agents will not! • I will help homebuyers realize a dream they otherwise thought impossible!

9. Transactions galore!! • REO properties • Auctions • Tax sales • Bank foreclosures • FSBooooo’s • FHA, VA, and Fannie/Freddie inventory • Estates • Your own inventory

10. About the loan programs • History of the programs • How they can be used • Economic benefits • Different from other financing • Pre-consultation and pre-qualifying • Transaction types

11. Eligible Properties • SFD residential • 2, 3 or 4 unit properties • Mixed use properties (FHA only) • Modular homes • Manufactured (Mobile) • Most anything that can be turned into a home

12. Possibilities are Endless! S.P. $160,000 + R.F. $8,500 S.P. $10,000 + R.F. $160,000 S.P. $50,000 + R.F. $50,000 S.P. $85,000 + R.F. $27,500 S.P. $230,000 + R.F. $260,000 S.P. $45,000 + R.F. $11,000

13. Compare to Alternative Alternative First loan Sales price: $50,000 Closing/prepaids/points: $3,000 Total acquisition: $53,000 Loan amount: $45,000 Down payment: $5,000 Total cash required: $8,000 P & I payment: $330.16 @ 8% 30 year fixed. Second loan Renovation funds: $50,000 Closing/points: $2,000 Total cash required: $2,000 P & I payment: $537.00 @10% 15 year fixed Both loans combined Total cash required: $10,000 Total P & I payments: $867.16 Renovation Loan Sales price: $50,000 Renovation funds: $50,000 Fees financed: $1,500 Points & prepaids: $2,500 Total acquisition: $104,000 Loan amount: $100,150 Down payment: $2,850 Total cash required: $6,350 *NOTE: Seller can contribute. P & I payment: $707.24 @ 7.5% 30 year fixed. 4

14. Let’s do the Math Acquisition cost simplified Sales Price + Renovation funds = Acq. Cost Maximum Loan to Value (of Acq. Cost) • FHA O.O. - 97.75% or 2.25% down • Conv. O.O. - 95% or 5% down • Conv. 2nd Home - 95% or 5% down • Conv. Investor - 90% or 10% down (with credit score above 700)

15. FHA owner occupied purchase looks like… • Sales price $100,000 • Renovation funds $50,000(incl. 10%) • Acquisition costs $150,000 • Loan amount X (97.75) = $146,600 • Down payment = $3,375 • Closing costs (EST.) = $4,500 • Prepaids = $2,484 • Discount points (EX - 0) = $0 • TOTAL CASH TO CLOSE $10,359* *Before seller contributions or 3rd party DAP’s.

16. Conventional owner occupied purchase looks like… • Sales price $100,000 • Renovation funds $50,000 (incl. 10%) • Acquisition costs $150,000 • Loan amount X (95%) = $142,500 • Down payment = $7,500 • Closing costs (EST.) = $4,950 • Prepaids = $2,484 • Discount points (EX 1.0) = $1,425 • TOTAL CASH TO CLOSE $16,359* *Before seller contributions or 3rd party DAP’s.

17. Conventional investor purchase looks like… • Sales price $100,000 • Renovation funds $50,000 (incl. 10%) • Acquisition costs $150,000 • Loan amount X (90%) = $135,000 • Down payment = $15,000 • Closing costs (EST.) = $4,950 • Prepaids = $2,484 • Discount points (EX 1.5) = $2,025 • TOTAL CASH TO CLOSE $24,459

18. Conventional investor refinance looks like… • Sales price = $40,000 • Renovation funds(incl. 10%) = $110,000 • After improved value = $200,000 • Loan amount X (80%) = $160,000 • Renovation funds = $110,000 • Closing/Prepaids/Points = $7,409 • Cash for sales price returned = $40,000 • TOTAL CASH AT CLOSING ($2,591) BACK

19. Get Borrower Pre-qualified or Pre-approved • How much do they make, owe, have...? • Cash required / Cash sources acceptable • Credit? Scoring • Qualifying ratios on each program • Automated underwriting • Consult with lender!!! • Pre-consult / pre-qualify...

20. Consultation to Application • Inquiry • Loan Consultation • Commit to apply • Get all docs and application completed NOTE: The process moves much faster if every credit document requested is supplied the first time around.

21. 5 Core Steps of a Renovation Loan 1. Application/Approval 2. The Work Write-Up 3. Appraisal 4. Project Management 5. Loan closes/Renovation begins

22. Step 1. Apply for mortgage / get approved • Take loan application supplying all necessary documentation • Verifications, credit reports, all ordered just like other loans • Pre-approval is allowed, recommended • Loan submitted to underwriting for decision • Approval with or without appraisal

23. Step 2. Complete Work Write-up • Specification of Repairs document • Importance of the Work Write-up • Beware of other reports (certificates) • How to get it done - Consultant or Contractor/Borrower • This is not a home inspection, but… • Appraisal...cannot be ordered until the Work Write-up is finalized!

24. Step 2. Cont…Work Write-Up • The final Work Write-Up should/may include: • A summary of the report including names, fees, attachments, and consultant disclosure of role • A narrative overview of the project • The line items including cost of labor, cost of materials, and description of work to be completed (in detail) • A floor plan of the finished project (if applicable) • Photos of current areas to be renovated (not required but helpful)

25. Step 2. Cont...Work Write-up: Consultant or Contractor/Borrower? • Consultant method • One stop shopping • Costs more ______, faster, approved 1st time • Contractor/Borrower method • Use Specification of Repairs • Plan is then reviewed • cheaper _____, slower, may not get approved first time

26. Step 3. The Appraisal • RMC will order once the WWU is finalized • Send order form, copy of contract, and copy of signed WWU • Appraiser will envision the finished home as if all work were completed and appraise as such • NOTE: THE APPRAISAL CAN NOT BE ORDERED WITHOUT THE WWU!

27. Step 4. Project Management • Who is going to oversee the job and who is going to do the work? • How to decide • Size of job • Experience, tools, other resources… • Time, materials and cash • What to look for • Explain financing to contractor!!!

28. Step 4. Cont…Project management: using a General Contractor/s • Borrower selects own contractor/s • Documents required: • “Homeowner /Contractor agreement” • W-9 • Copy of contractors license • Copy of insurance • Borrower can use one GC, or 2+ sub-contractors

29. Step 4. Cont…Project Management: Self-help • When is it allowed? • Documents required • Self-help disclosure • Self-help qualification letter • Bids for big ticket items • Use common sense

30. Step 5. Loan Closes/Renovation Begins • Closing agent selection • Closing takes place • 30 days to make first draw • Completion time • Final inspection • Extensions, hold back, lien releases • Contingency funds

31. Step 5. Cont...Draw Process • When to make a draw • Call Fee Inspector (usually consultant) • Performs inspection per Work Write-Up • Draw request form - signed by all • Fax to draw center • Title update ordered • Funds disbursed • Should make draw at least every 30 days!

32. Do the numbers make $ense? • What will it cost to renovate? • What will it be worth when completed? • Are there any incentives? • What should I pay (sales price)?

33. Find a Property / Study the Numbers • Bearing in mind…qualifying, etc... • Property search options • Two major pieces of information needed • Sources for general estimates • Analyze market value

34. Feasibility Study Def: A brief summary report containing eyeball estimates of what is needed and a range of cost for those reports. A cliff notes version of the WWU. • A borrowers scenario… • Pre-contract • Post-contract • A Listing/seller scenario…

35. Submit a Contract • Similar to regular contract • The “as-is” offer to the seller • Points, on what? • Seller concessions • Settlement date • Renovation contract addendum (See Renovation Mortgage Consultant)

36. Sweat Equity: Conventional vs. FHA • Work Write-Up specifies who’s doing the work • Sweat equity • Consider time and resources • Funds borrowed for labor: Conv./FHA • Work done - passes inspection • Receipts supplied • Check disbursed

37. Required/Eligible Renovations • Basic functional amenities • Amount of renovation allowed • FHA • Conventional • Eligible renovations • Luxury items? • Miscellaneous eligible • The 3 renovation limitations

38. Special Features • Finance mortgage payments • Sweat equity, and market equity • One loan, one low rate, tax deductible • You have an ally • Keep investments intact • Mixed use properties • No UFMIP on FHA 203K • Tax credits and real estate tax abatements

39. Investor benefits • Lend up to 90% on 1 & 2 unit properties. • Can finance up to six months mortgage payments. • Lend 100% of the cost of renovation (after down payment towards sales price). • Refinance properties already owned, that need renovation, both rate/term and “cash out”.

40. Energy Efficiency Mortgage • History of program • Benefits • Rating process • H.E.R.S. report • Contractor bid • Escrow release • Renovation loan benefits

41. Marketing Ideas to Help You Sell More Homes • Yard signs (before and after the sale) • Open house flyers and good faith scenarios • Feasibility studies from consultant • Before and after flyers on your listing • Table tent narratives during open house • Networking opportunities with other professionals • Homebuyer education workshops on renovation • Business plan for R.E.O. properties • And so much more…

42. Can you find this deal? • Buyer wants house - has little or no money. • Fixer upper is for sale. • The price is under the market, of course. • Buyer offers price but with a seller concession to cover all cash to close. • Seller, buyer and Realtor win, by creating a deal using built in equity and renovation lending. • Lender lends all funds for purchase and renovation in one loan.

43. Lets Sum It All Up • Unknown opportunity for borrowers/buyers • Ability to increase value added service and referrals • Become an expert on the program • Save neighborhoods, stabilize/increase value • Know the steps…get borrower pre-counseled and pre-approved • Make more money for yourself while using renovation lending to expand your market