Home Construction & Renovation – May

These words (except for quotes) are my views and opinions gathered from my experience in home construction finance and do not represent those of my employer.

Teardown & Rebuild…Its Easier Than you Think

Demolition of property for nmew construction
Tearing down to rebuild

A house that may be a good candidate for a teardown is in a desirable location but below the standards of the other homes in the neighborhood. It may be much smaller than average, have serious structural problems, require too many repairs, or have outdated heating, cooling, plumbing or electrical systems. It tends to be priced below the average for the neighborhood and often remains unsold for a longer period, unless it is actively marketing as a prospective teardown.

A Rule of Thumb to help determine if a teardown will support a newly built house is when the value is at two to three times the price of the teardown house at acquisition. For example, if you can buy an older, functionally obsolete house in a good location for $250,000 and a brand new house built on the same lot will support a market value of $500,000 to $750,000, it may be a good teardown candidate.

Once you’ve decided on the neighborhood, contact a real estate agent with experience in teardowns or substantial renovations. Realtors can often recommend potential builders for your project or you can contact the local chapter of the National Association of Home Builders for advice. Some mortgage lenders may also be able to provide a list of approved builders they have worked with on new home construction.

New homes are energy efficient, from the roof, windows, and doors to the heating and cooling system, an important feature for home owners today. They are wired for all the in-home entertainment and modern appliances we use today. The interior layout of a new home is customized for the style of living the home buyer wants for their family. For example, many homes are custom built now for multi-generational living. If these features are important and cannot be attained at a reasonable cost by renovating, then a teardown may be the way to go.

Buying a house in order to tear it down requires planning, some extra homework and some added expense. Demolition costs vary with the size and location of the teardown property, but generally range from $10,000 to $25,000. You may be able to recoup most of the demolition expenses by recycling some of the materials in the teardown by selling the contents or by tax-deductible donations.

Your municipality will require you or your builder to obtain a demolition permit before you start doing anything. You will need to contact the utilities companies to determine when and how to disconnect gas, electric, water services. Check with the fire department to determine what sort of inspections or oversight is required prior to demolition. Local government may also require inspections for toxic materials inside the house, which is a concern if the structure dates back to the 1960s and earlier, when asbestos was commonly used as a construction material in ceilings & duct work.

Can I finance a teardown?

Absolutely yes! Some banks offer mortgage products for new home construction and have a lot of experience lending on teardown projects. One such mortgage product ideally suited to finance a teardown is a construction to permanent mortgage, sometimes called a “one time close” construction to permanent mortgage.

Each construction to permanent mortgage is structured to meet the specific needs of the borrower. A one time close construction to permanent mortgage makes the financing simple. The borrower can focus on their project with peace of mind knowing both the construction financing and the permanent mortgage are approved, the rate is set and all the details for financing each stage from start to finish have been worked out ahead of time.

“The urge to destroy is also a creative urge.” – Pablo Picasso

Arthur Aranda • NMLS #1042093
Construction & Renovation Loans
New Jersey, New York, Connecticut
201-741-1537 talk/text


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Using Seller Concessions To Attract Home Buyers

A few years before the housing market started turning downward, it was virtually guaranteed that you would be able to sell your home if you put it on the market. In fact, in many markets there was a virtual hot bed of activity, with bidding wars driving prices well above the asking price. Low interest rates at the time were all the encouragement buyers needed to start snatching properties at historic rates. As a result, numerous investors were able to double the investment they had made in short period of time.

Many experts predicted that home sales would not continue at such record-breaking rates and as if they had crystal balls the real estate bubble did indeed burst. Equity evaporated into thin air, thereby causing once high hopes and expectations of many home owners to sink to the lowest along with their “underwater” mortgages. Once hot markets have declined rather rapidly, leaving investors and homeowners alike wondering what they can do to remedy their unmarketable properties as loan underwriting guidelines tighten and the market floods with inventory.

If you find that you absolutely cannot wait until the market turns around to sell your property and must sell it now, your best hope may be to employ creative marketing tactics.

The first thing that must be understood about the current market is the fact that the market is rife with choices. A few years ago buyers felt a decided pressure to move, and move quickly, when searching for a home or property to invest in. Choices were few and the best properties were likely to be snatched up as soon as they hit the market; Not so today! That is not the case because there are far more properties on the market, prices are lower and buyers know they have the advantage of being able to take their time looking. This means if you are going to be competitive in selling your property, you will need come up with something that will set your property apart and entice buyers.

In the last few years before the market crashed, sellers had no need to use seller concessions (a percentage of the property’s sales price paid towards buyer’s closing costs), although it was always available in varying amounts depending on the mortgage type utilized. In areas where the inventory is high, however, the use of seller concessions are becoming far more common. The range of possible seller concessions varies quite a bit. For example, you might provide a decorating allowance if your carpeting is outdated or use a seller concession to encourage first-time home buyers to consider your property.

In the past these types of concessions were not offered as often and were restricted to 3% if the mortgage was PMI or Conventional. All FHA-insured mortgage financing permitted up to 6% seller concession until the final stage of the S.A.F.E. Act took effect on January 1, 2010. In most pre-market-crash real estate transactions such concessions would not even be offered on a Conventional loan. That does not mean that they could not be offered during negotiations in order to attract seal the deal, so to speak, with a prospective buyer.

In today’s reality the key is to recognize that the balance of power has definitely shifted. Buyers hold the upper hand right now and sellers must be prepared to do what they can to attract them. If you have already taken certain steps to move your property, such as pricing it aggressively then you may wish to consider making some concessions to increase the interest of prospective buyers. It must be pointed out here that the number of qualified home buyers have also decreased due to the high unemployment numbers, so all methods, tactics and negotiation strategies must be employed in the marketing and sale of your home in today’s market.

One option would be to pay points for the buyer. This is actually a situation that provides a win for both parties. Let us say you have a property listed at $150,000. If you slashed the price 3% then you would be taking $4,500 off the price. You could use that same amount of money to purchase mortgage points for the buyers. In fact, you might even find that you can purchase a substantial amount of points. This strategy would allow buyers to obtain lower interest rate and as a result, have a lower monthly payment. This would make your home more affordable than similar homes in the neighborhood and may just provide the incentive a buyer need to snatch up your home.

A message to Prime Mortgages readers:

Thank you for your support. We will continue working to provide the most relevant and useful information about current FHA-insured programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!


For more about 203k, please visit the HUD website

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If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages, government run for 75 years. Lest we forget?

203k Construction

The FHA-insured 203k rehabilitation program permits the new construction of homes that have been demolished or will be razed, provided the existing foundation system is unaffected and will still be used. The complete foundation system must remain in place. This feature of the program makes it unlike other traditional mortgages and standard “New Construction” mortgages for the financing of one-to-four family residential properties in many ways.

Most new construction loans start with architectural specs and plans, environmental reports and, most importantly, the creation of a foundation upon which to construct the new home. Professional builders, professional engineers and local zoning inspectors are engaged to insure that the home, when finished will comply with relevant local ordinances thereby making it possible for the issuance of a Certificate of Occupancy.

At this point the purchaser/builder will be issued legal documents declaring him/her the owner of a legally constructed residence. That’s a very brief description of the new construction process which gives you a basic idea of what is involved. Most traditional mortgage financing plans, including the FHA-insured 203b program (sort of a big brother to 203k), provide only permanent financing.

What this means is normally lender will not close the loan and release the mortgage proceeds unless the condition and the value of the property provide adequate security. Therefore when rehabilitation is involved, the lender will insist that all rehab work be completed and improvements finished to meet lender’s required property standards before a long-term mortgage is made; especially when major construction was being done. This is a problem that has caused many a real estate contract to be cancelled (dead deals) for quite a long time.

Under the 203k guidelines and procedures, each situation discussed in the previous two paragraphs is addressed. In fact, the 203k program was designed to address those situations by providing the financing necessary for a newly constructed home on an existing foundation system that is unaffected, as well as a house in need of repair or modernization, with just one mortgage loan, at a long-term (30 year) fixed rate to finance both the acquisition and rehabilitation/new construction of the property.

203k funds are based typically on the projected value of the property with the work completed (the after-rehabilitation value).


Regulations. The provisions of Section 203(k) are located in
Chapter II of Title 24 of the Code of Federal Regulations under
Section 203.50 and Sections 203.440 through 203.495.

If the government can’t run business, how come business always run to the government for a bailout when it runs into trouble?
FHA-insured mortgages, government run for 75 years. Not too shabby, huh?