The Problems
Clients that were continuing to be beat out and could afford more, recently opted for a weird and awkward home in a fantastic neighborhood. The home was fully functional, but though they were purchasing from a flipping company, it was hard to tell what they actually did to improve it before flipping. Neighbors have told them that the place was a trash heap before the flippers came along. Seems they painted cabinets, dropped in new countertops, changed out the windows and painted the exterior a super ugly color and cleaned it up. Buyers had every possible inspection and aside from some mold in the attic, it really was given a clean bill of house. After all, you can’t flunk a house for being ugly, right?
My clients went in and put 5% down so as to preserve their cash. However, after getting some of the demolition done and living there a bit they made some ugly discoveries that were somehow missed by the professionals.
1) They already knew there was a sunken spot in the foundation and that it would need to be fixed and had budgeted accordingly. What everyone missed was an actual crack in the foundation! Ca-ching!
2) There were three different types of flooring on the main floor due to two additions to the original build. They opted to tear up all floors and match with hardwood in the original 1947 home. They also hoped that the terrible cat pee smell that after three moppings and a steam cleaning would not go away, would also be gone with the floors. Surprise! It was WORSE. They had to tear out the subfloor in that area too, some of the wood under the sliding door and the drywall. Smelly mess!
3) When they tore out the original house bathroom – down to the studs there was a LOT of mold – more than expected. It also appears that the sinking floor was likely caused by a very bad water leak at some point and surprise – more mold under two other rooms in the crawl space. Mold Remediators will be cleaning up (literally) on this one. They moved out at that point partly because most of the mold was under the primary bedroom – and it was time anyway.
That’s the journey so far. They are living elsewhere while the floors are being finished, the foundation repaired, the mold remediated and in the meantime doing demo in their free time. They have done everything right – getting inspections and now getting multiple bids for work that is needing to be done and only doing things themselves they know they can do and have the time and energy for. It’s easy to burn out at the beginning without pacing and planning. They also hired a designer and walked through with the designer’s engineer to make sure all of the things they want to do to the home can be accomplished reasonably. The upstairs part of the home is the weirdest in that there are two sets of stairs – two places and they don’t connect! These homeowners have great vision though and it will be deweirdified (yeah, I know that’s not a word, but I’m using it anyway) when they are finished. Their new neighbors are enjoying watching the progress and come by often with stories and suggestions!
The plan and the finance plan
There are a number of ways to do it. Since this is a move over/up home for them, they started by preserving most of the cash from their sale and putting only 5% down to purchase. Yes, there is MI, but that will likely be able to get waived once the value increases, or if they opt for a true construction loan at some point it won’t matter so much. They also have the advantage of the local area being in a very high demand and an inflationary market. This means ditching the MI could happen pretty quickly so it’s a small expense to pay for leaving them with a good pile of funds to work with.
They are also doing this in phases. The first goal is to make the main floor completely livable and their current stash will get them headed that way. Should they need more, we can do a credit line where the only appraisal is a drive-by and we can go pretty high on the LTV. Since they bought before peak season, their equity position has already increased – they got a really good deal on the home too.
At the end of Phase 1, the whole main floor will be updated, the mold gone and the foundation fixed. They are managing this phase themselves. Upstairs they will hire a contractor since it includes an addition and some structural revisions. At this point, they may opt for a regular construction loan where it is interest only the funds used during the 6-12 month construction phase and then converts to a regular loan at the end.
They are doing a good job getting and vetting their contractors. Getting three bids from people they have verified are in good standing, licensed and bonded. The bids are all over the map too. Example is the foundation problem – bids are anywhere from $6000-$26,000! The hardwood floor people they went with were half of what the highest bid was. It pays to shop. They also noted that if you can’t communicate with the person that is giving you the bid – for any reason (I’m not talking about language here – just basic ability to do business), then you should probably pass. One guy refused to give them a written bid, though he came highly recommended, they chose to pass. They have had enough surprises thus far and there will no doubt be more to come. They also have a designer to help them with space allocation, structural challenges and to create a plan that will be signed and good for permits.
Financing options synopsis:
- Your cash
- Credit line against the house up to the highest available
- Renovation loan or a Construction Loan. Note that the renovation loans are typically for conforming loan amounts and not jumbo. If the total amount that you owe plus the cost of improvements and closing costs plus another 10% are more than the current conforming loan limit in your area then you are going to likely need a regular construction or all in one loan.
- It’s more risky, but you can also run up your personal lines of credit and then refinance at the end. The risk is that you are assuming that the home will appraise out enough to take the cash back out and pay off those lines. In an inflating market it’s usually just a matter of time to win at that part of the game. I would also strongly recommend that you speak with a tax accountant about how this structure will work for you financially as I am not one and cannot give you advice in that regard.
Will update this some time later as they finish since they have been kind enough to share their journey with me.
If you have questions on this or anything else in real estate financing, please reach out. I’m happy to assist or brainstorm with you on making your dream happen.
Have helped buyers of all types and financial levels and worked on 1000's of loans.
There is always something new!
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