Investors have been taking advantage of low interest rates and discounted prices to buy run-down foreclosure properties, sometimes 10 or so at a time. They fix up the properties enough to be rented until the market turns, which could take years. When the time is right, the investor puts the finishing touches on the improvements and hopefully sells for a profit.

This can be a risky strategy for an inexperienced homebuyer. It’s hard to compete with investors who make all-cash offers. Investors usually have a team of contractors who can do the fix-up work. If they’re working on several properties at once within close proximity of one another, it’s more economical than fixing up one property at a time.

Financing the improvements to fix up a property in today’s market is difficult. Construction financing is virtually nonexistent. Most conventional financing requires a 20 percent cash downpayment. Before the subprime mortgage meltdown, fixer buyers often used a home equity line of credit (HELOC) to finance improvements.

Today, you would need to have enough equity in the property to tap this kind of money. For instance, if you made a downpayment equal to 50 percent of the market value, you might be able to find a lender that would give you a HELOC for up to 30 percent of the value.

HOUSE HUNTING TIP: Another option that doesn’t require a huge outlay of cash is to use the FHA 203K mortgage program that is designed specifically to provide financing for repairs and renovations to single-family residences. It is available only to owner-occupants, not investors. The maximum mortgage amount varies with location. It’s currently $729,750 in high-cost areas like the San Francisco Bay Area.

The program works like this: Suppose you buy an $800,000 home using your savings for the cash downpayment and a $729,750 loan from FHA. FHA 203K loans are available with as little at 3 to 5 percent cash down, plus some cash reserves to pay contractors’ initial payments. The interest rate is a little higher than it is on a standard FHA loan. …CONTINUED

When you make your offer, be sure to include a 45-day financing contingency and a 60-day closing. The seller won’t be happy with a 45-day financing contingency. However, if the listing has been on the market for some time with no offers, your chance of acceptance is good.

After your offer is accepted, you and your real estate agent walk through the property and create a wish list of all the repairs and improvements you’d like to make.

Then a contractor and FHA inspector preview the property and either approve or disapprove the items on your wish list. They might even add something to the list that they think needs to be done, like a new roof. Let’s say the approved amount for rehab is $40,000.

An appraisal is done giving two values: the property in its "as is" condition and the property after the improvements have been done. To get approval, the cost of the improvements ($40,000, in this case) plus the "as is" price can’t exceed the appraised value of the property after the renovations are complete.

After approval, the $40,000 for improvements is deposited into an escrow or trust account. Up to five releases can be made during the course of renovation. The work must start within 30 days of closing and be completed within six months. For more information about the FHA 203K Rehab Program, click here.

THE CLOSING: The FHA 203K program can also be used to refinance and finance renovations.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."


What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Thank you for subscribing to Morning Headlines.
Back to top
Inman Connect Las Vegas is back! A limited number of presale tickets are on sale now. Register today before they're gone.REGISTER×
Real estate news and analysis that gives you the inside track. Subscribe to Inman Select for $5.SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription