Teach me less popular ways of buying homes and the pitfalls/downfalls/extra hassle........

IE, 203k loans, auctions, short sales, pre-foreclosure and foreclosed homes.

I've done some searching around, but it seems most info provided on the web is designed to just give you enough information to go talk to a broker/realtor, etc.

I'm already pre-approved for financing, but I don't want to spend more than $175k.

Does anyone have a personal experience doing a 203k loan? This is the most intriguing to me honestly. If I can find the right property in the right neighborhood, I would deal with the inconvenience of dealing with the work while living in the house, and living off subway sandwiches and microwave ramen while a kitchen was gutted and redone for instance.

My anecdotes:

My dad bought a house that was foreclosed. It was a complete nightmare from the transaction point of view due to the owner. He was suing everyone left and right--the originator of the mortgage, the two companies that bought it, the collection agency, the judge that ruled on a couple of these cases... I am not joking. He sued the judge.

Well, he lost, and prior to the eviction he took out everything. Kitchen cabinets circa 1970. Took out an old, iron-stained toilet. Brick pavers from the back patio. A dishwasher from 1998. It honestly was a good thing overall; since it was held up in foreclosure the Bank had to pay to fix the serious things (dude took the electrical box, sump pump, boiler... these all had to be fixed by the Bank).

The point I'm making is that it took my parents over a year to get into the house (original offer was September 2015, they closed October 2016). Then there was all the work that needed to be done, and it took until April for that to be complete. It can take a long time to work these things out, and during that time my dad had to have a significant amount of money just sitting in the bank waiting to buy it. That didn't hurt him at all, but he's in a better position than most.

I looked into a 203k for a property we were interested in a couple of years ago. The details are a bit fuzzy because it was never seriously considered as an option, so I could be wrong, but here's what I remember.

I think the funds are dispersed in stages as work is completed. All work had to be done by a licensed contractor who was approved by the lender, which all but eliminated the opportunity to do work ourselves and save money. I don't recall if living in the house while work was being done was allowed or not, but I'd be surprised if it was.

Oh, one other bit of info: I had a really hard time finding someone to even talk to me about a 203 when I was briefly considering it, and this was in the third most populous metro of the nation. I dropped that idea for other reasons though, and YMMV.

(Waiting for carguy to comment)

STM317 wrote: I looked into a 203k for a property we were interested in a couple of years ago. The details are a bit fuzzy because it was never seriously considered as an option, so I could be wrong, but here's what I remember. I think the funds are dispersed in stages as work is completed. All work had to be done by a licensed contractor who was approved by the lender, which all but eliminated the opportunity to do work ourselves and save money. I don't recall if living in the house while work was being done was allowed or not, but I'd be surprised if it was.

There are now 2 different options for a 203k loan. One has a max of $35k in repairs/improvements, and another that is as much as they will approve it for.

On either you have start the work within 30days of closing and has to be complete in 6 months. If it's a serious rehab, they will put the first 6 months of payments at the back of the loan. If you couldn't live there while they did things like move walls, or replace the mechanicals like HVAC, plumbing, electric.

And you can do the work yourself, if you can prove that you have the actual aptitude and ability to complete the work in the time allotted.

We did a Fannie May Homestyle loan which is similar to a 203k. There were certain things that the money could and couldn't be used for (appliances etc). We ended up getting approximately $20k in renovation money used for the kitchen, repair termite damage and the roof which were all identified.

We were required to use a general contractor. There was one lump sum at the end in the GCs name though we could have requested draws. Fortunately the contractor was a friend of mine so I was able to do some of the less skilled and unrelated work myself.

I have to say I'm kind of shocked more GRM'ers don't have experience with these.

z31maniac wrote: I have to say I'm kind of shocked more GRM'ers don't have experience with these.

It's because they are a PITA.

We did the Homestyle loan like Greg Voth talked about. It had enormous challenges but is a great loan since we ended up with a "conforming" loan in the end (read: regular rates, no PMI, etc) while rolling close to $75k in improvements into the loan. I've posted about it before, and there are a lot of details to it to the point that I don't know how someone that isn't either a contractor or very friendly with one could meet the challenges. But it got us into our huge project house without much more than the usual 20% down out of pocket cost. (well, in our case, plus commissions .. plus a whole shedload of additional improvements beyond what we rolled into the loan, but that's because of our particular house / buying process)

The biggest one is: just getting a contractor to bid on a job is a huge task. Let alone getting them to bid on a job with a firm price and firm timeline on a house you don't even own yet and getting paid in one lump sum at the end (no partial / in-progress payments) - I did finally get two bids but ended up using my own license at work to bid the job when those bids were either substandard or too expensive. I don't imagine the process to working with the contractor once the bid was accepted would be any easier than it usually is, and involving a third party and specific payment processes would make it even harder.

A 203k is a very different loan but I'm sure it has its own challenges. I'm just not familiar with them.

203K is not a loan. It's a government subsidized insurance program.

It enables lenders to consider lending more on a property than it is currently worth. You are still gonna have to deal with a local lender (who is willing to work with the 203K, and who is willing to lend beyond what the property is worth). Lenders don't like to berkeley with them because they can't be sold into the secondary lending market until the repairs are completed and the collateral is sufficient for the loan they have written.

And what's their guarantee that the repairs will EVER be completed?

SVreX wrote:

z31maniac wrote: I have to say I'm kind of shocked more GRM'ers don't have experience with these.

It's because they are a PITA.

This man is correct.

Home improvements are hard enough when they're clean cut where an individual is working with general contractor. Add in a lender and inspections and appraiser and you've just made the process harder and the contractor more skittish. Good contractors have a full schedule and they don't want to mess with what sounds like a pain to them.

dculberson wrote:

SVreX wrote:

z31maniac wrote: I have to say I'm kind of shocked more GRM'ers don't have experience with these.

It's because they are a PITA.

This man is correct. Home improvements are hard enough when they're clean cut where an individual is working with general contractor. Add in a lender and inspections and appraiser and you've just made the process harder and the contractor more skittish. Good contractors have a full schedule and they don't want to mess with what sounds like a pain to them.

This man is also correct.

As a contractor, I'd tell you to jump off a cliff. I'm not wasting my time bidding on a job to someone who doesn't even own the house.

You could probably do the work yourself, but you will still need a licensed contractor to bid the work, and that would lead me to tell you to jump off a cliff and berkeley yourself on the way down. (I get calls all the time from people who want a "free" estimate, with no intention of hiring me to do the work)

And if I was a lender, I'd still tell you to jump off a cliff. Why should I take the risk on BS like that??

SVreX wrote: 203K is not a loan. It's a government subsidized insurance program.

True, I didn't think about that. It's still common to refer to them as 203k loans of course. Just like an FHA loan is really just a loan, with FHA insurance.

And what's their guarantee that the repairs will EVER be completed?

That's what shocked me about any of these loans; once I had one I realized just how big of a gamble they are for everyone involved. This stuff is hard and expensive, and the average person just doesn't have the know-how to navigate it cleanly, in my opinion.

Auctions... If you mean Government or Sheriff's sales or tax sales, etc. You probably won't be able to borrow money for these. Cash only.

Short sales and foreclosures- Don't necessarily come empty, can take a year to close, shake deal- can still fall through, and you may end up with a squatter occupying it when you take possession- which will then be YOUR problem.

SVreX wrote: This man is also correct. As a contractor, I'd tell you to jump off a cliff. I'm not wasting my time bidding on a job to someone who doesn't even own the house. You could probably do the work yourself, but you will still need a licensed contractor to bid the work, and that would lead me to tell you to jump off a cliff and berkeley yourself on the way down. (I get calls all the time from people who want a "free" estimate, with no intention of hiring me to do the work) And if I was a lender, I'd still tell you to jump off a cliff. Why should I take the risk on BS like that??

Let's just fill this thread all day, agreeing with each other. That's a welcome change of pace. ;-)

On the Homestyle loan at least, once the contractor bid has been used to secure the loan, you actually can't do the work yourself, and you have to use the contractor that bid the job. Yes, I'm sure there's a mechanism to change contractors if something goes wrong, but it's not a simple "well I decided to do the work so send me a check" kind of situation.

I ended up paying one contractor $350 to get him to bid. I didn't mind - he spent a lot of time looking at the job with me. Another one I had to spend a half hour on the phone with him reassuring him that I wasn't going to freak out the minute he found something more wrong with the house, and I had to come up with a bid sheet specifying exactly what was to be done to the house, not a single thing more under the bid he submitted.

Those were the general contractors - the roofing contractor is a guy I'd spent probably $40+k with in just the last few years and he still was hesitant about even looking at the job since I didn't own the house yet. I had to reassure him by saying that if the deal didn't go through I was $12k out of pocket (no contingencies on the contract to buy!) and that I was certain the deal was going to go through.

Lots of hand-holding, lots of money out of pocket before even thinking about closing on the house, and this was supposed to be the "simple" way!

SVreX wrote: Auctions... If you mean Government or Sheriff's sales or tax sales, etc. You probably won't be able to borrow money for these. Cash only. Short sales and foreclosures- Don't necessarily come empty, can take a year to close, shake deal- can still fall through, and you may end up with a squatter occupying it when you take possession- which will then be YOUR problem.

You can't even get into the Gov't or Sheriff's sales auction houses. There's literally no way to get a loan on them until you own them and have possession of them - and who knows what you'll find when you finally get in the door! I did bid on one, I had to have the cash to buy it and then planned to refinance into a mortgage once we owned it. Big gambling going on there and I was heartbroken not to win the bid but in retrospect it was for the best. I bid $427k on a house I'd never even set foot in! How does 4 years ago me seem young and foolish?

+1 to what dculberson is saying.

We were absolutely required to use a contractor. It was a pair to put the estimate together even though I basically wrote it up myself with the contractor (my friend) by their guidelines. It was rejected twice even though I had the bare essentials in there.

I was hoping to buy the home through a regular conventional mortgage and pay for the renovations cash but the only lender I found to do that required the work to be completed within 30 days.

In fact that only reason we got the house was due to the first party with a contract on it being unable to secure financing in time.

The only other option you can look into is a private mortgage/loan. Complete the repairs then get a loan on the finished house. My understanding is these are usually interest only loans and at a much higher rate. The one I researched was 10% interest only iirc. Not a bad option if you complete the repairs quickly and get a standard mortgage but is certainly riskier.

A cowroker's son used one of those "Homestyle" type loans to buy a distressed house. Yep - had to use a contractor for most of the work, but he figured out a way to do some of the work himself. He parlayed the experience into becoming a handyman contractor himself.

My wife and I were looking at a house the other day thinking how nice it would be--layout wise. Bones were good too, but it wouldn't have passed an inspection (needed a new water heater, oven, kitchen sink, and bathroom--not "oh, those need to be replaced soon", but actually were broken or missing/removed).

We came to the conclusion if we were seriously looking we'd have asked my dad to buy the house for us and pay for the upgrades, then buy the house for him. Quick back of napkin calculations said that we could add about $150k worth of value for about $50-$75 worth of renovations, being conservative (i.e. 2-5x the cost of HGTV estimations). But we're not seriously looking; we just bought our house about a year ago.

Another option I've not seen mentioned, probably because there are few examples out there, is buying property directly from your local government. We did that with our building in IL, and it was a mostly painless process, although that would also depend on how much competition you might have for the property.

When you say 'foreclosure', do you mean buying at foreclosure auction or after the foreclosure auction once it has become Real Estate Owned (REO)?

A foreclosure auction is fraught with peril for the inexperienced, and sometimes even the experienced. Not that it can't go well, just that it's the old risk vs reward scenario. Great potential reward, but also carries great risk. How much are you willing to gamble?

On the other hand, with an REO the bank has taken on the vast majority of those risks, and with only a few exceptions is not much different of a seller than anybody else from the buyers perspective. Our REO purchase was really only different relative to buying from any other individual owner, in that the bank could not provide any disclosures and was not willing to make any concessions. So it required a good inspection, and rather than having the 25 year old roof or windows replaced by the seller before hand and rolling it into the loan, we had to do it out of pocket after the purchase. In exchange for that inconvenience, it came at a significantly (and still negotiable) discounted price. I don't know if the bank would have been willing to deal with us directly, but we did have a 'buyers agent'. We were able to view it before offering (with contingencies), as with most other 'traditional' home purchase (unlike not-so-short sales) the transaction time was ~1 month , and it was after the bank had taken full possession...So the prior owner was long gone and the general condition was already known.

Let me say that there's a reason there's a "standard" way to do things in real estate.

Anytime you buy something a non-standard way be prepared to pay more. It may be down payment, it may be interest rate, it might just be in all the work involved to fix it up and make it meet code.

If a house won't meet standards, whether it's condition, price or area, then you've got a big problem and sometimes there's nothing you can do to make it meet standards for when you want to sell it. That means you may not "make out like a bandit" when it's time for you to sell.

You always buy property with the thought that you will want to sell it one day.

Also when you buy a foreclosure you have to ask yourself Why was it foreclosed upon in the first place? In the midst of the recession there were some areas you could say the economy, but most places that still wasn't the reason it was foreclosed upon. In other words it usually wasn't an owner problem, it was a property problem.

Also when you buy a foreclosure you are buying as-is and that doesn't mean as-is when you view it, that means as-is when it closes. Here's a real life story from a house about 2 blocks from me. A man bought the foreclosure knowing it was a corner lot with foundation probs and needed a roof (all things that are less than desirable) but before closing someone stole the AC and kids broke in and decided it would be fun to build a fire and roast marshmallows not in the fireplace, but in the middle of the carpet in the living room. He still had to buy the house and VA was not responsible for it.