- The Washington Times - Friday, April 20, 2001

Does the perfect resale home even exist? Prospective buyers might find one residence with the kitchen, breakfast area and family room of their dreams, but it comes with a yard that's too small, or too few bedrooms. The next house they visit could have great bedrooms and a great location but lack the requisite family room for entertaining.

The current tight market compounds the problem.

"Two years ago, there were about 10,000 listings at any given time in Northern Virginia, including condos, town homes and single-family homes," says Rosie Harsch, a Realtor with Long & Foster Real Estate in Tysons Corner. "Today, there are only about 2,000, so sometimes homes are selling in a matter of hours after they are put on the market.

"We're finding that if a buyer is a little handy or has a little extra cash, they will take care of the wallpaper, repaint a house and re-carpet after they buy, just so they can get into a house," she says.

Minor decorative and repair work is fairly common, but some buyers today choose a house that needs more extensive changes before it becomes the home of their dreams, Realtors say.

"There has always been a certain buyer who would prefer to buy an 'as-is' property and fix it up on their own," says Sally McLuckie, a Realtor with Taylor Real Estate in the District. "Doing this requires a certain amount of cash and expertise. But with inventory so low, people who might not have intended to buy a 'fixer-upper' are sometimes buying them because they are not able to find anything else. It's absolutely much more common now than it used to be for people to choose a home which is not necessarily what they wanted because of the low inventory of homes out there. One thing that helps is that you have to put down so little cash as a down payment now that people often start out with extra cash to do the work."

As-is homes used to be bargain-rate properties that could be purchased inexpensively even if they were in a good neighborhood. In theory, a buyer would find a cheaply priced home, make some renovations and then reap the benefits of a higher value home by selling it or living in it and watching the equity build.

"The problem today is that these homes are not being offered at a cheap price," Mrs. Harsch says. "Sellers are in the driver's seat, so they don't have to do anything. For example, I recently saw a home in Vienna which was just in fair condition, nothing really special, and it was priced at $319,000. It had 12 contracts placed on it almost immediately and sold for $365,000. In that case, the location was so great that everyone wanted the property no matter what the house looked like."

According to Miss McLuckie, sellers always will be a little better off if they choose to make minor repairs and cosmetic changes before they sell their home, even in this market.

"If sellers make changes that cost around $15,000 before they put their home on the market, they are likely to recoup anywhere from $40,000 to $50,000 more in the sales price," she says.

Should the owners choose not to do the work before putting the home on the market, sellers of as-is homes still will be able to sell in this market for a reasonable price, Realtors say.

"Agents will price an as-is house on the lower side sometimes, but it won't be low compared with what the home would have sold for a few years ago," Miss McLuckie says. "It's still a bargain, but now the bargain is just in getting the house, not in the price. People are willing to pay extra money to renovate in order to grab up a home."

While some financially secure buyers easily have the money to buy a home and renovate it at the same time, others can benefit from loan programs offered by most lenders that allow the renovation funding and the mortgage to be wrapped together in one loan.

"Our loan program is called 'Plus Mortgage,' and, in a nutshell, it's a loan to acquire a property or refinance a property and roll in the cost of the home improvement at the same time," says James Capps, regional senior vice president of the mid-Atlantic division of Market Street Mortgage.

"If a buyer can't find a home they want, but they find a home which has potential, they can come to us with plans and ideas and we can arrange financing," Mr. Capps says. "The key is that the home's value for the loan is based on the appraised value after the improvements are made. For example, if someone is purchasing a $300,000 home but it needs a remodeled master bath and new carpet, and the buyers would like to add a Florida room addition off the kitchen, they will need about $75,000 to $80,000 for these improvements. We would furnish the plans, and hopefully, the appraisal would come up with a value of $375,000 to $380,000 for the improved home. Then we make the loan for the appraised amount."

Lenders such as Market Street Mortgage have safeguards built into the loan so that buyers cannot just take the extra money and fail to make the improvements.

"The way this works is that the buyers will make their down payment and then, at settlement, that portion of the loan which is allocated for the home improvements will be held as construction funds in an escrow account," Mr. Capps says. "We then disperse the funds to the contractors as the work is done, over 60 to 90 days, or however long it takes to finish, or upon completion."

Mortgage consultant Mary Krueger with North American Mortgage Co. says, "Lots of people don't realize that they can afford to take advantage of programs which allow you to roll in the cost of building in the custom features they want in a home.

"Usually, buyers are pre-qualified for a loan so they know how much they can afford to spend, and then we can recommend a qualified home inspector who can provide cost estimates, identify the life expectancy of various systems and recommend replacements if needed. The buyers can explain their vision of what they want the home to look like, and get estimates on what that will cost," Miss Krueger says.

"Then, the sales price and the total renovation cost estimates are added together and become the acquisition price of the property. So, for example, a $250,000 home that needs $50,000 of work will need a loan of $300,000. Buyers will need a little more cash upfront because the down payment will be made on the full amount of the loan, not just the sales price of the home," she says.

North American Mortgage Co. also allows customers to finance as much as six months of mortgage payments if they cannot live in their new home while renovations are completed. This saves buyers the need to make two mortgage payments during this period.

"Interest rates on these purchase-renovation loans are usually about one-half percent higher than the going interest rate, which is comparable to most construction loans," Miss Krueger says. "This is because the lender is assuming additional risk by lending on something which doesn't actually exist, which is the renovated property. In addition, these loans require more maintenance because payments must be issued from the lender to the contractors. The money for these payments is kept in a separate, interest-bearing escrow account, and before payments are made, the homeowner, a home inspector and a contractor all need to agree that the work has been completed properly and at the agreed price."

While wrapping home improvement costs and home purchase costs into one loan may seem like the perfect solution, there are some pitfalls. Often, while the work is being completed, the home may be uninhabitable, a situation that requires the buyers to stay in their current home or move twice. In addition, as anyone who has had a home remodeled can attest, the process requires patience.

"People are too busy," Miss McLuckie says. "Even if they want to have the work done, the time just isn't there, and, often, people are afraid of making a mistake. Another problem is that it can be hard to find a contractor available to do the work, and materials often cost more than expected. Sometimes, people move into a house and then have to wait six months or more for the work to even get started.

"One couple I worked with bought a home in Chevy Chase with the intention of putting on an addition, but a year later, they decided to sell the house and buy something larger," she says. "They just didn't want to deal with the upheaval of the renovation."

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