Many properties in the current market – especially distressed ones or those that have been vacant for an extended period of time – can be good buys.
But they can also come with challenges.
The challenges could be significant damage from water or mold, or missing essentials like furnaces, hot water heaters or, in some cases, copper tubing.
Traditional mortgage programs, such as those offered by Fannie Mae and Freddie Mac, shy away from properties in need of major repairs or replacements.
There are other options, though, such as the increasingly popular Federal Housing Administration (FHA) 203(k) rehab program.
The program rolls the purchase price and estimated repair costs into one loan.
Let’s say you’re looking at a home with a purchase price of $100,000, and it needs $15,000 worth of work.
You would go to an FHA lender that handles 203(k) loans and get a loan for $115,000.
The first $100,000 would be disbursed at closing, with the remainder provided as the project progresses.
An independent FHA consultant is hired by the buyer, on behalf of the lender, to oversee the process and to protect the interests of you and the lender.
A general contractor is then selected.
A general contractor must be used, instead of doing it yourself or hiring someone you know to do it, unless he or she is a general contractor.
The contractor must have references and a line of credit that will allow him or her to pay for materials and services until he or she is reimbursed from loan proceeds throughout the course of the project.
Work must generally start within 30 days of closing and must be completed within 90 days of the start date.