There is nothing new about buying an “ugly duckling” house and turning it into a swan. Smart home buyers have been doing this since the first caveman found a smelly hole in the side of a mountain and cleaned it up before moving in.
But there is one group of investors that has taken this value-added technique to a new level. They are called HomeVestors of America, and I attended their national convention in Las Vegas last week.
Some 400 franchisees from across the nation gathered there to learn from each other and refine their home rehab techniques. The HomeVestors formula is deceptively simple. Some reluctant owners prefer to trade a discounted selling price for a quick and easy “as-is” sale. As a result, investors are able to negotiate a bargain price on a house that likely would not draw any offers on the traditional market.
Sometimes these homes need so much work that the investor might as well be building a new home. Standard procedure involves replacing the electrical system and the plumbing. In addition, most of these homes need a new heating and air conditioning system. As these investors are quick to point out, at this point they have already spent close to $20,000.
No renovation can be financially successful unless it also addresses the issues that made the home ugly in the first place. So the standard painting and cleaning are followed by all new floor coverings and typically a replacement kitchen with new countertops.
Once the house is ready to occupy, it is offered to the public on the retail market or perhaps placed into a rental program in hopes of long-term price appreciation. And even though the long-term prospects look bleak today, these investors are uniformly looking beyond today’s stormy economic weather.
Because they get such good deals when they buy, these investors can offer their finished retail product at prices low enough to attract buyers, even in today’s slow sales environment. Their biggest concern today is the lack of long-term financing for non-owner occupants. In other words, if an investor uses his own funds to acquire and rehab an ugly house, he needs to be able to then refinance the improved property with a permanent fixed rate loan. This allows him to recover his working capital so he can repeat the process.
But as of Dec. 1, the principal source of funds for these loans has been eliminated by an arbitrary decision from Fannie Mae. According to a new decision by the mortgage giant, no one can be approved for a new loan for a rental property, regardless of their qualifications, if they already have four or more home loans showing on their credit report. This includes home equity lines and vacation home loans.
So if an investor wants to buy and renovate homes in a neighborhood suffering under the weight of numerous bank-owned foreclosures, he is essentially prevented from doing so by this “four-loan rule.”
Investors remind us that the nation’s housing market is currently drowning in these bank-owned homes, and that it is exactly these houses that the investors wish to purchase and rehab. But until a source of long-term funding becomes available for the refinance of the fully renovated houses, these investors are handicapped.
They also state that they are not looking for a handout. Non-owner occupant loans have long carried a premium interest rate and been limited to substantially stricter loan-to-value limitations.
For example, earlier this year it was typical for an owner occupant with good credit to be able to obtain a 30- year fixed rate loan at 6 percent interest and be able to borrow up to 90 percent of the purchase price.
Investors, on the other hand, were routinely offered 30-year loans at a rate of 7 percent or higher, and loan amounts were often limited to between 65 percent and 80 percent of the appraised value. As a further precaution against fraud, lenders often have required multiple appraisals of the property to insure the value of their collateral.
Today’s full-time investor is willing to accept these limitations, and even more, simply to be able to get back in the business of buying and repairing ugly houses. But in these challenging economic times, it seems our government is turning a deaf ear to the one part of our real estate community that wants to help solve this part of the problem.
I spoke with John Hayes, president and CEO of HomeVestors of America, about the funding issue. He replied that his management team has repeatedly been to Washington in an effort to educate lawmakers, but that no promises have been made so far.
His job in the coming months is to get the message across to Congress loud and clear: America’s real estate investment community is ready to buy and clean up the unwanted and ugly houses in our neighborhoods today. They simply need the tools to get the job done.
John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.
