J Tillman's Blog

203k Mortgage Project - Practical Priority

John Basinger - Wednesday, May 01, 2013

203K home buyers whether seasoned or a first time home buyer looking to get in to a home are looking at distressed properties. Everyone fitting this interest wants to improve a distressed property, complete their renovation and be in a position of positive equity. Whether your looking to live in this property or turn around and sell the property for a profit the considerations you make should be the same.

Where to begin is confusing for most and knowing what can be done with your 203K funds are quite another daunting concept. If you don’t know the cost of materials or the cost of labor to remove existing, and install new materials you need help from company like ours to provide the missing links “Information”. Taking a distressed home and turning it into a beautiful dwelling takes forward thinking and at times a creativity to attain your goal.

Prioritizing your project is paramount to success and raining in your wish list is harder then most people can admit. Through the 203K program you have limited funds to improve any project and once those funds run out the balance of funds has to come out of your own pocket. Many watch their savings dwindle in an instant and the reason for this is they didn’t have a conservative objector (a seasoned contractor) guiding them towards positive equity as the end result. Some properties are so distressed pending your purchase price you may or may not be in a positive equity situation. Each home is unique and the distressed condition of each home can vary greatly.

The fundamental question for every 203K project is: “What do I need”? This one question quickly looses priority when shopping for materials, finishes and appliances taking a back seat instantly when substituted for the mindset of “This is what I want”!

Almost all distressed properties are owned by banks or lenders because the majority of these homes have gone through a foreclosure process. Banks are masters at assessing their risk and balancing that risk with respect to maximizing profit. This balancing act is a course of everyday business and something you should always keep in the forefront of your mind when considering any distressed property. Banks are not accustomed to leaving money on the table so the price you are paying likely includes their maximum assessed profit for that particular property. In other words, they are certain to take all potential equity available based on the current market.

The fact that banks operate this way doesn’t necessarily mean your investing in a zero equity position. With the 203K mortgage you are increasing your equity position; If the funds earmarked for improvement are utilized properly. The only reason banks don’t make these improvements on their own is because they are not contractors and their focus is on turning properties with little or no investment.

Buying a distressed home for 150K in a neighborhood of homes that average 200-225 gives you a clear general idea of how much you should improve your new home. You want to complete your improvements and come out with a positive equity position so making improvements that cost you 75K obviously would not put you in a positive equity situation. This doesn’t mean you can’t invest 75K+ as long as your not worried about your equity position. If your looking to take your project from the red to black in reference to an asset your objective needs be compromise. If you invest 35K into your 150K home it makes more sense if spent wisely than the 75K from an equity position, but what would you fix with the 35K to maximize your return on investment?

Each home has its individual quirks so making the decision to repair or update specific items must be clear and you need be 100% committed to the improvements and reserved to working in your “Wants” at a later time prior to signing the final loan agreement. Your best safeguard is to engage a contractor you are comfortable with and one that will be conservative, sometimes blunt and looking out for your best interest.

Contractors come in all shapes and sizes both financially liberal and financially conservative (with your investment). It’s easy to spend 30K on a house and your contractor could have you there in about 5 minutes. Weighing your return on investment is the safest way to move forward. Improvements that are proven are a time tested value and there are statistics on the benefit of most major remodeling projects.

Once you understand actual improvement benefits of individual projects you can make educated fiscally responsible decisions. Improve your new 203K home project as you can afford to make the changes. Not everything on your list will get completed with your improvement funds. This is the normal reality with distressed homes.

We recommend making a priority list of improvements, making safety hazards your number one priority. Once you have determined the cost of making your safety hazard improvements you should look at the functionality issues of your new home then the cosmetic aspects. Functionality includes the basic operations of your home, the electrical system, heating system and plumbing systems. Cosmetics might include kitchen or bath cabinets, updated plumbing or electrical fixtures, choosing hardwood over carpet or installing heated floor tile.

Recommended Priority List

  1. Hazards
  2. Functionality
  3. Cosmetics

The hierarchy of project improvements are clear pending your personal interests. The explanation given is based on practicality. If you are looking to complete your project with hopes of being in the black prioritization is a must and finding a good seasoned contractor is paramount.

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