How to Finance the Purchase and Remodel of a Home: FHA 203k Loan

What is an FHA 203k loan?

An FHA 203k loan, is also known as a Rehab Loan or FHA Construction loan. This kind of loan allows you to finance repairs to the property, and lets the buyer add personalized touches to their new home! As with all FHA or HUD products, the borrower must plan on living in the home as their personal residence. Through the process the lender tracks and verifies that the repairs are being completed, and is able to lend on  homes that usually don’t qualify for a loan (typically lenders don’t approve loans for homes in need of major repair). The FHA 203k loan allows a buyer to purchase and fix a property within one transaction.

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A standard FHA 203k loan is only offered by select lenders, and the process is much more rigorous than an FHA 203k Streamline loan. I would recommend going with a streamline loan because it allows for up to $35,000 in repairs. If you are a first time home buyer I would not suggest looking at properties that need more than $35,000 in repairs, because the construction process can become lengthy and tiresome.

 

The FHA 203k Streamline Loan:

This loan allows a borrower to finance up to $35,000 in repairs. The FHA 203k loan requires a 15 percent “buffer” (called a contingency fund) on the total amount of the combined bids (in case there are any overruns or minor unforeseen costs). If a portion of the contingency fund is not used, then it is credited back to the borrower. Therefore the “real” maximum amount, that the total cost to repair the property, cannot exceed $31,000. Keep in mind, this loan is only for non-structural and non-luxury repairs (no tennis courts). Although, you may upgrade to granite counter tops and gut the bathrooms.

What Can the Construction Loan be Used For?

  • Kitchens
  • Bathrooms
  • Appliances
  • Flooring
  • Roof repair or replacement
  • Painting
  • Repairing safety and health issues
  • Energy-efficient improvements

 

The Process:  

  1.  Apply for a loan with an FHA 203k streamline lender (ask your lender if they have completed this kind of loan within the last year. Hopefully the answer is yes!).
  2.  Get approved.
  3.  Find a contractor.
  4.  Get bids for the work (I recommend getting up to 3 bids, and make sure that the contractors are giving you quotes for “apples-to-apples” repairs. i.e. using the same materials).
  5. Finish all of the paperwork and close the loan.
  6. Have the contractors complete the repairs.
  7. Move in to your new home!!!

 

Hack: HUD has a search page that will allow you to see if your lender successfully completed at least one 203(k) rehab loan in the last 12 months (type your lender’s name into the search bar located at the top of the page and then check the box for 203(k) rehabilitation mortgage insurance program).

 

Eligibility: 

  • Credit score: FHA requires a minimum credit score of 580, but many lenders may require a score of 620-640 to qualify. Check with your lender for their specific requirements.
  • Down Payment: FHA loans require a 3.5 percent down payment (based on the purchase price + total cost of repairs). If you are short on the down payment, you may receive a gift from your family to help you purchase a property.
  • Debt-to-Income Ratio:  You should speak with your lender about their particular requirements.
  • Loan amount: You can finance up to 110 percent of the property’s future repaired market value (home price + repair costs). Since the FHA 203k is a type of FHA loan, they are subject to your region’s FHA loan limits.
  • Occupancy: This loan is for owner occupants only (no investors).

Additional resources:

 

In conclusion, the FHA 203k streamline loan is a great way to purchase a home and add a few personal touches to the property prior to moving in. Are you interested in the FHA 203k streamline loan? Do you have any particular questions about who to talk to regarding a certain question? Comment below.

 

 

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The Future of Residential Real Estate: Zillow and RedFin

Zillow (Z) and Redfin (RDFN) are publicly traded companies, and I believe that they offer an interesting investment opportunity, both in the purchase of property and through owning their stock. They have only been trading on the market for the past 2-3 years, and have a ton of room to grow. Zillow and RedFin have just rolled out new programs that are revolutionizing the real estate industry.

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How Residential Real Estate Has Evolved:

Way back in the day, a Realtor would obtain a listing from a seller (documentation stating that the realtor had exclusive right to represent the seller). The Realtor would drive down to the Real Estate Division, and post it on a cork board alongside all of the other homes for sale in the area. The Realtor would look at all of the homes for sale, think of each buyer she represented, and see if any of the properties fit their needs. Now, let’s fast forward. The MLS (Multiple Listing Service) was born! Real Estate Agents, usually coalesced by area, formed groups to share listing information over an intranet. For example, the Las Vegas the local Realtors association is called GLVAR. Only paying members had access to the MLS, which safeguarded all of the access information to the homes currently on the market. The MLS provided a great source of historical information, from which realtors could pull comps also known as a CMA (comparable market analysis). A CMA is the estimated current market value of a property (see a prior blog on real estate valuations).

The Current Situation:

With the proliferation of the internet, even the government is finally getting on board! One can find tax assessment values, home characteristics (sqft, bedrooms/bathrooms, etc), and search home addresses to find who the owner is and how to contact them. Disclaimer: some states are non-disclosure states, and finding information on properties in these areas is next to impossible (even real estate agents need to estimate square footage). Example: certain areas of New York, Pennsylvania, and Maryland (mostly the Northeast).

Zillow, RedFin, and Trulia saw this niche in the market, and have aggregated the public data into a user friendly free website. Of course, nothing in this world is truly free. When an internet user finds a particular property of interest, they willingly give their contact information to Zillow, who then turns around, and sells the “lead” to a Realtor. Zillow and RedFin have revolutionized the real estate industry by providing current and historical data to the public. I would relate this to the scale of how the printing press revolutionized the transmission of knowledge.

Zillow’s Instant Offers:

Zillow is now attempting to replace the MLS system (multiple listing service), by connecting homeowners with sellers directly. Zillow’s Instant Offers provides homeowners with offers from investors alongside a comparative market analysis (from a local real estate agent). To use Instant Offers, the homeowner provides Zillow with some basic information (bed/bath count, square footage, remodel information, views, etc.), and photos of the home. Once an offer is made, there is no obligation for the seller to accept any offers.

RedFin Now:

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RedFin is another company that is disrupting the traditional residential real estate industry process. RedFin is a vertically integrated technology company that is also now a brokerage firm. “RedFin Now” allows Redfin to buy and resell homes directly with its customers. RedFin is now essentially double-ending transactions (earning commission for being the listing and buyer’s agent). One benefit, from the seller’s perspective, is that they will not have to worry if the buyer’s funding will fall through.

The Future:

With these new programs, it is possible that many residential real estate agents will be squeezed out of the market. I could see a future where a company like “Rocket Lawyer” could provide all of the paperwork to buyers and sellers for them to complete in front of a notary. I believe that the landscape of the real estate industry is evolving rapidly due to Zillow and Redfin’s new programs. There are so many possibilities that Zillow and RedFin could engage in, for example  RedFin could create a subsidiary company and flip the homes to increase their return on investment.

Throughout history there are many industries that have evolved and positions that have become obsolete. A few examples are the whaling and automotive industries (most car factories are now automated). There are many areas within the real estate industry that cannot yet be outsourced. This transition will cause a shift of residential real estate agents into other areas of real estate (commercial, flipping, mortgage/portfolio analysis). What do you think? Comment below.

Photo credit Zillow

Photo credit RedFin

 

 

 

Real Estate: A Few Rules of Thumb

Who Pays Which Fees:

Remember that all fees are negotiable and depend on the current market climate. For example: if there is a shortage of inventory and home prices are increasing, then the leverage shifts to favor the seller (seller’s market). On the other hand, if there is a high REO saturation (bank owned properties) and a large number of homes on the market, then the buyer will have more negotiating power (buyer’s market). The buyer usually gets to choose which title company will complete the escrow process, but currently the market is experiencing an inventory shortage (this is the case across the country). This means that sellers are typically writing counter offers, and changing the title company along with a few other terms in the contract (such as price, close date, etc.).

The Seller:

  • The agent fees. Typically a real estate agent will list a home for 5%-6% of the home’s selling value. The agents usually split the fees, 3% to the listing agent and 3% to the buyer’s agent. Often times the listing agent (with the seller’s approval) decides on how the agents split the commission, and can take 3.5%  while offering 2.5% to the buyer’s agent.
  • If the home is located in an HOA (home owners association), the seller must purchase the resale package(s).

The Buyer:

Both the Buyer and the Seller:

  • Typically the cost of escrow is split 50/50.

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How to Calculate the Value of a Home:

I have been working for a real estate appraisal management company for the past two years. On average I process 60-100 Broker Price Opinions per day, for homes across the United States. I have personally found that Zillow’s online estimate (Zestimates) is a good indicator of a property’s value. From my experience, the Zestimate tends to value homes on the higher side, so I use it as the “maximum value” that a property is worth. The tax assessed value tends to be a good indicator of the lower limit of what a homes is worth. Depending on the area, the tax assessed value can be dramatically different than the actual market value of a home (California is one example of a state that assesses the taxed value much lower than the actual market value of the home). The value tends to reside somewhere between the price of the average sale in the area (homes with similar characteristics within 1 mile), the Zestimate, and tax assessed value.

Are you looking to purchase or sell a house? If so, where and are there any questions you have about the process? Comment below!

 

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How to Become an Expert: 10,000 Hours Over 10 years

According to Malcolm Gladwell, the author of “Outliers“, 10 hours over 10 years makes you an expert. There has been a lot of controversy around this research, but one thing is for sure. If you practice one thing for 10,000 hours, you will be at least very well versed in the subject and/or quite good at performing that task. In a prior blog I discussed how there are 168 hours per week, of which work consumes 40 hours, and sleep takes up 56 hours (8 hours x 7 nights). This leaves us with 72 hours to live “Your Life”. Is there a talent, hobby, or new career path that you would like to study or make progress on? This blog post shows you how to break down a big goal (like 10,000 hours of practice) into a manageable plan, to become an “expert” or at least “very competent” at that skill.

Knowledge-sharing

Assumptions:

  • 10,000  hours ÷ 10 years= 1,000 per year

Calculate the number of hours of practice you have at your current full-time job:

  • 5 days per week x 8 hours per day = 40 hours per week
  • 5 work days per week  x 4 weeks per month x 12 months = 240 work days
  • 40 hours per week x 4 weeks per month x 12 months per year = 1,920 hours in practice of skills that you currently use for your job.

Calculate the number of hours you will need to practice per day to gain 1,000 hours of a skill per year on your own time (not during work hours):

  • 1,000 hours ÷  240 days = approximately 4 hours per day 5 days per week or
  • 1,000 hours  ÷  365 days per year= approximately 2 hours and 45 minutes per day

Personal Example: What Makes me Qualified to Write About Real Estate?

I have been involved in the real estate industry since 2010. I obtained my broker’s license in California (2010) and in Nevada (2011). I started my career working for Regency Centers, a publically traded company, in the leasing department (commercial strip malls and neighborhood markets). In 2011, I moved to Las Vegas to start and run a company in the hospitalities industry (for more information on this topic, visit the “About Me” page). While I was working on my company, I sold residential real estate for my 9-5 job. I worked as an agent in a team setting, and then became a transaction coordinator for one of the top producing agents at the number one real estate team in Las Vegas (Shapiro&Sher Group, Berkshire Hathaway Home Services). During the time that I worked at Shapiro&Sher Group, they sold $220 million in volume. I have purchased and flipped my own home, and have been working for an appraisal management company assessing real estate values 3 days per week from 2016-2018 (while obtaining a Masters degree in Business Administration).

Breaking Down My Real Estate Experience:

2011-2014: I worked in the residential real estate industry for 3 years x 1,920 hours per year (see assumptions)= 5,760 hours of residential real estate sales practice.

Plus…

2016-2018: 3 days per week x 8 hours per day x 4 weeks x 12 months=1,152 hours per year  x 2 years = 2,304 hours of real estate valuations practice.

Total Number of Hours Practicing Real Estate: 5,760 + 2,304=  8,064 hours of real estate knowledge.

Keep in mind that the number above is a very conservative number. I am not counting any knowledge gained during the time that I worked in commercial leasing, or when I switched my schedule to work full time on running my company (Select Lockers). I am also not including any of the knowledge I gained over the past 3 years from being a part-owner of a large multi-use high rise building in Chicago’s prestigious financial district (I re-invested a large portion of the gains I had made from the sale of my company).

As of today, I have been in the real estate industry for 8 years, and have about 8,064 hours of practice. I am by no means an expert, but I am on my way to 10,000 hours of practice in one subject matter over 10 years!

PracticeBecoming an expert is possible:

  • 10,000 hours ÷ 10 years = 1,000 hours per year
  • 1,000 hours ÷ 12 months= 83 hours per month
  • 83 hours ÷ 30 days =2 hours and 45 minutes of practice per day

Steve Jobs, Oprah Winfrey, you, and I all have the same number of hours on this planet. What are you doing with your spare time?

Is there something that you would like to become an expert in? Is there a new career path or passion that you wish you could master? If so, comment below and tell us what you are doing and how you plan to get there!!!

 

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