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How I Saved the Deal: Don’t let cash buyers scare you away.

posted Dec 15, 2017, 3:06 PM by Joyce Evans   [ updated Dec 15, 2017, 3:18 PM ]
By PSAR REALTOR® Member Rafael Perez 

My client was determined to buy a home and return to the historic Downtown San Diego neighborhood where he was raised. But things had changed since his family had relocated due to rising rents. In the 1980’s, the community was known for many issues. There was evidence of drug users, liquor stores, transients, and debris. Even though some people were moving out, many community leaders stood their ground and things improved. Combine an improving neighborhood with nearby downtown development and increased demand, and the result was rising rents.

After having moved out of the community, my client was determined to return. After graduating from college and a credential program, he landed a job as a high school history teacher. He had saved for a down payment. As a first-time buyer, he had a good credit rating. He had calculated a price point he could afford. However, unfortunately, we had lost bidding wars to all-cash buyers on several properties on numerous occasions.

Then, he fell in love with a duplex property some would have considered as the ugliest house on the street. The owner was an elderly woman likely in her 80’s who lived with her special needs daughter. The house was full of stuff and was in a state of deferred maintenance. Major repairs, including severe foundation issues and a complete overhaul, were needed on both the home facing the street as well as the two-bedroom apartment in the back. The owner already had received several all-cash offers which were deemed too low because the proceeds were needed for the long-term care of the occupants.

Here’s how I saved the deal: I recommended FHA renovation financing, which enabled my client to offer another $40k higher than existing cash offers. My client was approved for an additional $150k in renovation financing. The seller was willing to wait for a longer escrow at a higher price. The seller also agreed to a seller credit for the buyer’s closing costs.

FHA’s 203(k) program and Fannie’s HomeStyle Renovation Mortgage have been around for years, but more REALTORS® should consider them. Renovation mortgage programs can offer cost-effective solutions for buyers and homeowners who want to renovate. In many cases, calculations are based on what the house is expected to be worth after the home rehab is completed. Also, if needed, homeowners can use programs to refinance both their existing mortgage plus the renovation costs into one loan.

In a standard FHA 203(k) program, the borrower will hire a HUD consultant to assess the construction plan and to perform an inspection before each draw is made. A “draw” happens when a portion of the money is disbursed to the contractor. Borrowers have up to six months to finish the project and are allowed up to five draws. With many 203(k) loans, borrowers can get up to 110 percent of the home’s appraised value.

In this success story, my client moved into the apartment in the back while his parents and siblings occupied the home in the front. The ugliest home on the block became the most beautiful. My client then became active in improving and enhancing his childhood community (now that he was a homeowner).

The best advice I can give to any REALTOR® who wants to save a deal in situations like this is to think outside the box when it comes to financing programs out there. It’s likely there’s a loan program available that can save a deal and make it a reality. Also, don’t let cash buyers scare you away when pursuing renovation opportunities. Ask around and become good friends with a HUD-approved home consultant who should know where to start and which lenders are experienced in handling renovation-type loans.