Abe the Agent had a great eye for value. One day while on tour he spotted a home that obviously needed work.
The home was in a good neighborhood. Interest rates were low, and rents were increasing.
After he was done with his tour, he decided to call his old client, Ivana the Investor. Abe had helped her buy rental property in the past.
"Hi Ivana, it's Abe. I know we haven't spoken for a while, but I spotted a home on tour today that I think you should take a look at."
Ivana, always interested in a good deal, hopped in her car and met Abe at the property.
"Abe, this is horrible, why are you wasting my time?"
"Hold on Ivana, let's go through the property first and let me explain what I see and why this home is a good investment."
Abe took Ivana through the property. Ivana really liked the layout. Abe pointed out, however, many items that needed upgrading. The kitchens and bathrooms were old and needed to be updated. The interior and exterior needed to be painted. And, most importantly, the roof needed to be replaced.
"Abe, I love the location and the layout, but I don't want to deplete my savings to fix this place up."
"Ivana, I had a feeling you would say that. How would you like to buy this home and finance the upgrades?"
"Abe, I am familiar with the FHA 203K loan - that will not work. I am not going to live here The FHA 203K requires owner-occupancy."
Abe replied, "Ivana, I have done my homework - have you heard of the Fannie Mae Homestyle loan?"
"No I have not, does it apply to someone like me, an investor?"
"Yes it does Ivana. This loan will allow an investor to add the costs of upgrades into the loan amount, using the after-improved value!"
"OK Abe, what's the catch?" "There is no catch. Instead of making a 25% down payment and paying for 100% of the renovation costs out-of-pocket, you borrow 75% of the after-improved value to finance the upgrades!"
"For example, suppose there was a property that cost $400,000 that needed $100,000 of improvements. The cash-out of pocket would be $100,000 for the down payment and $100,000 for the upgrades, totaling $200,00."
"With the Fannie May Homestyle renovation loan, 25% of the after-improved value is $125,000, so you would have to come up with $75,000 less!"
"Sounds pretty good so far. The yards need landscaping and the fences are broken. Can I use the money to fix these up?" "Sure, as a matter-of-fact, you could even finance building a pool. As long as the repairs are permanently affixed to the property and add value, the Fannie Mae Homestyle loan will allow you do it!"
"Abe, this all sounds great, I am 99% there, anything else I should know about the Fannie Mae Homestyle loan?"
"What if I told you that the seller is allowed to credit 2% of the purchase price toward your closing costs?"
"I would say Abe, thank you, let's write the offer!"
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