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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2018

Renovation Loans: The Next Great Niche?

Delving into this market, however, will require you to get outside your comfort zone

Renovation Loans: The Next Great Niche?

Sure, you’re a mortgage originator, but what’s stopping you from helping your clients line up a loan for a new pool or helping them arrange financing to buy and completely renovate a drab old home? Or maybe you can arrange the funding for a borrower pursuing a more modest remodeling effort aimed at adding a little dazzle to a tired property.

The mortgage market is taking a beating. Maybe now’s the time to branch into renovation loans.

A self-help guru, Dr. Spencer Johnson, wrote a little book nearly 20 years ago with the unlikely title of “Who Moved My Cheese?” Even though it sold 26 million copies, today the book has largely been forgotten. But now might be the right time for our industry to re-read it.

The book’s message, in a nutshell, is that when environments (or market conditions) change, participants have two choices. They can move to a new, unfamiliar and some-times scary place to thrive again. Or, they can stay where they are, keep doing what they’ve been doing and risk extinction.

You see where I’m going? For decades, refinances have been the “cheese” that sustained the mortgage industry. But that market is shrinking fast and, thanks to rising rates, probably not coming back anytime soon.

Yes, the purchase-mortgage market is growing, but not nearly fast enough to make up for the drop-off in refinance. And now, nearly every lender and mortgage originator is positioning themselves as purchase experts and frantically chasing every deal.

So, where’s the smart next move — or less-crowded market? Well, it could be an opportune time to get off the beaten path and start specializing in renovation lending, with a laser focus on a few prime products in that niche.

Pool time

One of these renovation-loan products is pool loans. Think about it. The economy is cruising along. Tight inventory and higher prices are discouraging move-up buyers, so more homeowners are adding amenities, including swimming pools.

Today, depending on where you live, the average inground pool can cost between $35,000 and $100,000 (the national average is $49,498) to purchase and install. And that’s not including the many popular backyard makeovers that often go with the pool — think patios, decks, firepits and so on.

Pool contractors, of course, are the originators’ connection to the end borrower. It’s fair to say that both the referral sources and their clients probably aren’t entirely up to speed on some of the newer renovation-loan options.

A renovation loan might be all that’s needed to bring a property back up to code and make it more attractive to a broader pool of homebuyers.

In many cases, however, they could benefit from today’s renovation-loan products that let borrowers finance improvements.

This is often particularly attractive in situations where someone is building or buying a new home and wants to add a pool at the same time.

Helping referral sources solve problems for homebuyers and homeowners has always been one of the strengths of our industry. Why not leverage your expertise and experience as an originator to help new partners find ways to delight their customers? If this works for pool contactors, what about other specialty contractors, like solar-panel installers?

Realtor connections

By now, most Realtors have been barraged by cold callers and loan officers telling them they’re experts on purchase loans. Maybe it’s time to try a new approach.

The lower end of the housing market has been tight for the past few years, making it a seller’s market. As a result, many buyers are forced to grit their teeth and buy homes that they are often less than excited about.

Probably everyday your Realtor referral partners hear something like this: “We’re not crazy about the kitchen and the bathrooms. Is this all you have to show?” What if you positioned yourself as an expert on renovation financing who can offer workable, affordable financing solutions to your Realtor partners?

Sitting down with the Realtor and the homebuyer, working through different options — like buying and upgrading a home with a single loan — is one way to differentiate your business from the on-line and loan-by-phone lenders. Those competitors may have bigger ad budgets, but they likely have far fewer seasoned originators on the ground in your community. There are several options for renovation loans available. Among them are conventional financing as well as Federal Housing Administration and Department of Veterans Affairs (VA) programs with loan-to-value ratios based on “after-completion” values.

A VA renovation loan, for example, allows qualified borrowers to purchase a home with no downpayment and the ability to finance remodeling, renovations and repairs. The financing can be provided through a one-step process that allows the borrower to roll the rehab loan in with the purchase mortgage — allowing for one interest rate and monthly payment.

This innovative program gives VA borrowers the flexibility of buying less-expensive homes that may need work and being able to finance the purchase and upgrades through one affordable financing path.

The HGTV approach

Another new approach to Realtors would be to come at it from a property perspective. Every Realtor has “tired” listings that stay on the Multiple Listing Service (MLS) for months, when more attractive homes are selling within days. What if you researched the properties that have been on the market for 60 to 90 days?

Generally, if homes haven’t sold in this market, it means there’s a challenge there, right? Because every good property that’s priced well, most likely, is moving pretty well in a low-inventory market. So, if that is the case, why not make an appointment, go see that Realtor, and present renovation-financing options to address the home listings that are having a hard time attracting buyers.

You might even encourage the Realtor to consult with a designer or a construction contractor. In some cases, it might be worthwhile to create a storyboard and display samples of tiles, fabrics, etc., at the property. Yes, it takes work and effort, and might add some cost, but at the end of the day, it isn’t all that different from “staging” a home. It also gives the Realtor new options, instead of just coming down in price.

Now the real estate agent can say something like this to the client: “Hey, you know what? Here’s the way the kitchen exists today, but using this loan product, you would have access to X number of dollars. Here’s a sketch of what the kitchen could look like, and here are the materials that you could use for a property upgrade.”

Some people can look at properties and see the potential immediately. Others can’t see it until it’s laid out in front of them. So, this approach would help homebuyer prospects who need a tangible look and feel.

Now they can look at the quartz sample for new countertops, and the nice gray color next to it, and think, “Wow this would look really nice, and we’d have a brand new kitchen basically.” It’s similar to the approach used on cable-channel HGTV’s “Property Brothers” show, where state-of-the-art digital-imaging software is used to show potential home-buyers what properties will look like after being remodeled.

There also are properties listed as “can’t be financed.” Sometimes, that’s because the properties are viewed as tear-downs. In this category, they are marketed to a small pool of cash buyers, usually for rock-bottom prices. Depending on the circumstances, however, a renovation loan might be all that’s needed to bring a property back up to code and make it more attractive to a broader pool of homebuyers, and perhaps make it possible to sell the home for a higher price.

In contemplating a move into the renovation-loan niche, it’s worth noting what Warren Buffett’s long-time partner, Charlie Munger, said, “I find it quite useful to think of a free-market economy — or partly free market economy — as sort of the equivalent of an ecosystem. Just as animals flourish in niches, people who specialize in some narrow niche can do very well.


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