Nation's mom-and-pop real estate investors receive second chance

Only months after small real estate investors lost a popular fixer-upper loan program to a mini-scandal, the nation's mom-and-pop investors have a second chance.

A quasi-federal agency announced plans to give investors -- and nonprofits -- special mortgage deals to help finance the renovation of rundown houses.

The new program, similar to the federal 203(k) program suspended last November, was announced here by Fannie Mae during the recent National Association of Home Builders convention. Investors won't find Fannie Mae's home-improvement program as lenient as 203(k) loans because of safeguards designed to eliminate insider deals and other scams. Still, Fannie Mae -- the nation's largest source of mortgages -- has committed to providing $100 million worth of loans in what it calls an "experiment." In a traditional loan, a borrower first gets a mortgage to purchase a property. Then, the investor either uses his or her own money to fix up the property or obtains a second loan to make the improvements. Under the new program, investors can both purchase the property and include the fix-up costs in a single loan of up to $214,600.Investors also can refinance homes to renovate up to the same amount. A key sweetener in the transaction is that investors can get loans for up to 95 percent of the value of the property after it is renovated. That's significantly higher than the normal 70 to 75 percent loan investors usually can get. Once the home is renovated, a new buyer can assume the loan with a 5 percent down payment. "The key for an investor is to be able to spot properties where the acquisition costs and price of the rehab is less than the appraised value" of the property after the work is completed, said Herb Moses, Fannie Mae's director of housing initiatives. How much profit investors can make "depends on their talents for spotting undervalued property and bringing it in at budget," Moses said. Robert J. Sahadi, a Fannie Mae vice president, said the program was geared to help revitalize neighborhoods with old or functionally obsolete housing stock -- with an entrepreneurial assist. "The scope of this type of rehab is often very intimidating to a potential buyer," Sahadi said. The new program "allows an investor experienced in property rehabilitation to assume the burden of major repairs." It could be especially valuable in cities with active rehabilitation markets such as Oakland, San Francisco, Chicago, Minneapolis-St. Paul, Los Angeles, Washington, D.C., and Long Island, N.Y. To minimize risk to the lender, investors need a down payment totaling 20 percent of the "as completed" value of the property.The down payment, a bit heftier than the 15 percent required by the Department of Housing and Urban Development in its 203(k) program, is held in escrow until the property is sold. Investors can only have four Fannie Mae home-improvement loans at any one time, including a personal residence. And the loans are for single-family homes; no duplexes or small apartments are eligible, as two- to four-unit buildings were under HUD. To curtail fraud, the "as completed" value of a property must be ascertained by an appraiser -- with a second judgment by a different appraiser when the work is actually completed. Fannie Mae also will discourage "flips" -- the quick sale of real estate -- by requiring lenders to determine whether the property had been sold at any time during the previous two years.In the 203(k) fraud investigation, federal auditors found a number of sham transactions where properties were sold several times at inflated values just before loans were made. To encourage home ownership, the house must be sold within 18 months to a buyer who will live in the property. However, an investor could keep the property -- as a long-term investment or for any other reason -- by applying the down payment and any profit to the loan balance. The renovation portion of the loan can not exceed 50 percent of new "as-completed" value. But unlike the 203(k) program, investors can throw in some fancy toys -- such as a Jacuzzi -- if it will enhance the property's value. "A Jacuzzi may be the key sales thing if a yuppie wants to move back into a city like San Francisco," Sahadi said. Investors also must have experience in home renovations. But Sahadi said that can be as little as working on one or two homes or participating in the renovation of one's personal residence. Fannie Mae said it plans to fund between 1,000 and 2,000 loans this year -- kicking off the program in March or April -- and another 5,000 loans in 1998. That's far below the 17,000 loans HUD financed last year before it imposed a moratorium on investor participation in the 203(k) program. HUD has been exploring ways to eliminate abuses uncovered by the audit, and the moratorium is expected to be lifted sometime this year. "What we've learned will let us improve on their mouse trap," Sahadi said. Investors who want a list of lenders participating in the Fannie Mae program investors can call Fannie Mae at 1-800-732-6643. (Corrie M. Anders, Examiner Real Estate Editor, covers real estate and housing. For a copy of his brochure, "Where and how to purchase delinquent property tax lien certificates that pay up to 24 percent," send $4 with a stamped, self-addressed envelope to 484 Lake Park Ave., Dept. 20, Oakland, CA 94610. Visit his Internet home page at http://www.sfgate.com/columnists/anders)

Copyright 1997
Provided by ProQuest Information and Learning Company. All rights Reserved.