Revitalizing That Old House

“McMasion” is a term that came into existence in the mid-1990s to describe certain types of housing. It was not, and is not, a term of endearment but rather derision. Most suburban areas have a development or two that exemplifies this type of house that share several commonalities. That being said, there was an appeal to the marketplace that included these features:

·  Living Space — 2,500 to 3,500+ square feet houses are quite common

·  New — In many minds “new” equals “better” and any major repairs were years off

·  Conformity — It was a fairly good bet that the surrounding properties would be maintained in similar condition to one another. Thereby preserving the monetary investment

In my personal opinion, however, these properties, while certainly being an attractive (occasionally even luxurious) option to homebuyers, do not have the same character as some vintage homes. In my area, we have what is termed “Millionaire’s Row” where several of the so-called Robber Barons of a bygone era lived. Granted, we have our share of McMansions and everything in between as well.

FINANCING THE PROJECT

FHA Mortgage — A federally insured loan (a.k.a. an FHA loan) can be obtained for the purposes of purchasing and repairing a property. Under what is known in the industry as a 203(k) loan (For the lawyerly types that is 12 U.S. Code § 1709 – Insurance of mortgages § 203 (k)). As with any FHA loan, there are limits on the cost of the property and the amount borrowed among other items. For a 203(k) loan, there is actually a minimum repair cost to qualify.

Fortunately, there are 203k lenders who can offer expert advice to navigate the rules and regulations.

Traditional Lenders—Some banks, mortgage lenders, and credit unions offer programs that allow a client to get a loan on a property that needs fixing-up. In many, if not most or all, cases things like down payment, interest rate and length of the loan are going to be less favorable than the FHA option.

Cash — The simplest option. If the cash is available, hire a good contractor and have at it.

In either of the mortgage scenarios, a licensed/certified appraiser is going to give the lender three numbers. First, an opinion of “as is” market value; next, a detailed estimate of the repair cost (industry jargon, “cost to cure”); and an “as repaired” opinion of market value. This allows the lender to crunch the numbers to see if it will work for them.

I should note that the appraiser’s “opinion of market value” is a specific technical term. I won’t get into all of that here, but a helpful pdf can be found here. Many people, including industry professionals who should know better, will say “so this is what the house is ‘worth?’” Not the same thing. At all.

NEW HOUSE VS. OLD

If someone is in the market for a new place to call home, one obvious choice is to get into a newly constructed house. Whether a custom-built house or one a builder has started on spec, the buyers know that everything is brand-spanking-new from the footers to the roof.

A second option is to purchase a “used” home. Here, I’m talking about the type of house that is the bread and butter for most Realtors®.

For the more adventurous, a certain satisfaction is to be had in taking a property in some state of disrepair and revitalizing it. I should note there are two different terms used in property renovation which are not interchangeable (as some people think).

Replacement Cost — This is the cost when original materials are replaced with newer substitutes. For example, redoing the bedroom walls with drywall rather than plaster and lathe board.

Restoration Cost — For example, redoing the plaster and lathe rather than hanging drywall. This is usually a much greater cost and most likely won’t recoup the money in the market if the house is resold.

In my professional life, I have viewed, quite literally, thousands of houses and thousands more of other appraisers’ reports. By far, my personal favorites have been the ones where someone takes a formerly stately or a historical home and restores it to its former grandeur. As much as is possible, using original materials to make Cherrywood banisters, cast iron plumbing and marble foyers. Those people were, on the whole, doing it for their own enjoyment and not for a return on investment.