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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2017

Say Hello to Renovation Lending

This secret weapon can help put your year back on track

The first quarter of 2017 is coming to a close, and this is proving to be dramatically different year in the mortgage industry. A massive amount of time has been devoted to discussing market uncertainty and rising interest rates, and many mortgage professionals have read every article while silently waiting for the mortgage industry to self-destruct.

The 2.75 percent interest rate may have gone the way of the dodo bird, but our industry does not find itself on the brink of extinction. Clever mortgage originators began to prepare for the changing landscape months ago, and are thriving today despite the loss of refinance business. They found a product that enhances every aspect of real estate sales financing, is resistant to price sensitivity and helps redefine them as premiere service providers who offer services beyond the capability of their competition.

This strategic advantage is effective and accessible, and not only can it salvage 2017, it can propel this year’s production outlook beyond the success of 2016 for originators who learn its capabilities. It is time to reveal the identity of this mystery savior: For those of you who have not yet made its acquaintance, say hello to renovation lending.

Competitive advantage

Renovation lending — and yes we are speaking about Federal Housing Administration 203(k) and HomeStyle loans — provides originators with that ever-elusive competitive advantage they seek. Renovation loans work phenomenally well with purchase business, and we just happen to be in purchase market now.

These days, relationships with referral partners are crucial to the success and survival of an originator’s business, and in a purchase market the primary referral sources are real estate agents. Providing these renovation-loan programs can set an individual originator apart from the field of suitors who are all jockeying for a Realtor’s attention. The natural question that arises here is: “How is this accomplished?” The answer is far more straightforward than one would imagine.

Giving real estate agents access to renovation loans allows those Realtors to greatly enhance the sales techniques they apply to their daily business operations. Small deficiencies with properties can be remedied prior to the borrower moving in. Fixer-uppers can be masterfully re-imagined and renovated. Properties the agent lists as a seller’s agent can be renovated to capitalize on their full market potential. The impact of adding the ability to sell a tangible, finished product instead of selling the potential of the existing property totally shifts the paradigm of the homebuying experience because it grants easy access to all homebuyers.

Distressed properties

Consider the reality of selling fixer-uppers. On paper the prospect seems surefire: Find a distressed or dated property in a great neighborhood at a discounted price and make renovations to the home to bring it up to market standards and satisfy the buyer’s wish list. The end result is a move-in-ready, customized, modern home at a significant discount; a home that echoes a standard of living previously unobtainable to the buyer because of budget constraints.

Conceptually this is a surefire solution that sounds ideal for a homebuying market, but in reality this concept is often out of reach for prospective homebuyers. The barrier that separates homebuyers from the ability to work with fixer-uppers is purely financial, and this financial barrier is the primary reason why real estate agents cannot successfully sell less-than-perfect homes to most buyers.

The discount in list price, even when it is $100,000 or more, does not translate into spendable money that buyers can use to make renovations to the property. Most buyers are not willing to resign themselves to living in unsuitable properties while stretching a staccato rehab plan across several years. So the notion of buying a fixer-upper is immediately nixed once the buyer reveals they do not have the cash on hand to make the renovations.

Typically, this is the end-game moment for the property. The Realtor puts on a brave face and begins to locate other homes the buyer may find more suitable. Instead, look at what happens when a mortgage originator intervenes and deploys the secret weapon or renovation lending.

After the buyer’s financial revelation, the Realtor can query the buyers regarding the exact renovations they would like to make and give an initial analysis of the cost of the renovations and the potential value added to the property as a result. With a specific price tag in hand, the agent can inform the buyers that they could borrow up to 96.5 percent of the total cost of the renovation project.

More opportunities

The final picture in the above scenario is a property featuring the custom-designed renovations delivered within six months of the buyers taking possession of the property. This is an idyllic picture made accessible by the use of a renovation-lending program provided by the Realtor’s favorite referral partner.

Realtors connected to an originator with access to renovation lending products instantly gain the ability to sell even problematic distressed properties, which increases their visibility in the market. All the while, originators leverage renovation products to deepen their referral relationships and maximize the flow of referrals they receive. The increase in business from real estate agents alone will help originators sustain a healthy flow of business in 2017 and beyond. The most amazing thing about this new secret weapon is that this is only one of the ways it can enhance origination business.

In an ultra-competitive mortgage environment, renovation loans can create multiple opportunities to expand origination business and convert more opportunities to fund loans. They help cultivate new, lucrative referral sources, create more direct word-of-mouth referrals, and preserve loans that would otherwise be lost because of issues with subject properties — by eliminating the possibility that a leaky roof or a cracked foundation can mess up a closing.

•  •  •

2017 is a different mountain to climb, but the odds are not nearly as insurmountable as many feared they might be. An open mind, fresh tactics and a new secret weapon are all any of us need to once again be king of the hill.


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