In the booming housing market, renovators present both opportunities and challenges
In normal housing markets, Americans want move-in homes. But the post-pandemic housing market is far from normal, and soaring prices have caused home buyers to change their expectations.
According to a TD Bank survey of Americans looking to buy their first home in 2021, at least 71% are not looking for their dream home. Instead, they buy a starter house or a house to renovate.
For buyers frustrated with lack of inventory and skyrocketing prices, older homes can be a good compromise. Of course, buying a renovator means you are embarking on a project fraught with uncertainties.
Scott Lindner, national sales manager at TD Bank Mortgage, says buyers need to prepare for the special challenges that come with home renovations, like dealing with contractors and running endless errands at Home Depot. He asks a few questions about the top fixer trend:
Q: What drives interest in repairers?
A: We are seeing the prices go up. The National Association of Realtors says prices increased 23.6% from May 2020 to May 2021. This low inventory has been a problem since the 2008 financial crisis. We haven’t really added a lot of inventory.
Q: What types of loans are available for renovations?
A: Many lenders have an FHA 203 (k) loan that allows people to buy a home to renovate. If it’s a lower amount, you can pay off your old credit card balance, but you also need to understand what that means from an interest rate perspective.
If you already own the home, a home equity loan is an option. Many home equity loans achieve a loan-to-value ratio of 90%. And with interest rates where they are today, if you haven’t refinanced in the past year and a half, it might be a good idea to go ahead and do a cash refinance.
Q: What advice do you give to a first-time buyer who is considering a renovation?
A: First and foremost, be part of the inspection process. Buyers don’t always take this seriously. Maybe they hang out in the living room while the inspector makes his rounds. You should become attached at the hip. Truly think of the inspector as someone to go around and learn more about the property.
Also, a great way to buy a home is to sweat a lot of equity. If you can do a lot of the work yourself, you can potentially save a lot of money.
It is possible to discover additional issues, so be aware of cost overruns.
Q: What is a common mistake made by flooring buyers?
A: The most serious and damaging mistake is to underestimate the cost of your renovation. No matter how much you think you value, there are always surprises. You have to assume that there are going to be cost overruns. It is better to go there anticipating this. You should probably be thinking of a 15-20% cost overrun.