A Perspective on the Standard Sale vs the 203K Rehab Sale

I’ve been debating whether to write about the following examples for some time and recently shared my thoughts with a few of my real estate agent friends, FHA officials and 203K Consultant colleagues.

I see firsthand the potential savings that lie just below the surface of the FHA 203K Loan program. The value appreciation and subsequent positive karma derived from wise investing creates joy in those who benefit; the money isn’t bad either.

As I travel about the city working as 203K consultant I’m constantly reminded of the need for neighborhood pride and I often find myself in conversation with area leaders discussing how to help  slow the migration of both inner city neighborhoods and rural developments marred by the recession. But we can do more, and we should.

Let’s compare two sales and in theory, compare two worlds. One world is still hanging on. Hanging on to a time when profits were flowing and value was runaway. Sales were quick, easy and often.

The other world is reality; the reality that those times are history and most likely not going to repeat itself for quite a while.

Let’s compare the standard sale (yesterday’s reality) vs. the renovation sale (pure reality) and look at where the money flow is concentrated. Keep in mind that there are assuptions being made about value and cost. But I’m not out the ballpark here in my numbers (it’s my job to know them well). I’ve seen much more profit being taken by buyers than my example shows.

Standard Sale

• Agent works with a buyer who has the ability to purchase a $200,000 home.
• The buyer’s payment is amortized on $200,000.
• The home needs no work and is move-in ready.
• $200,000 X 6% commission = $12,000.

The sale usually happens within 30 days or less (usually). The agent sends the buyer a house warming gift and a Christmas card. 4 years later the buyer is now a seller and the agent gets the call (hopefully) to list his/her home and the buyer is lucky to make 6-8% increase in value in the four year period.

• The sale nets the client (now the seller), $14,000 profit (7% increase in value)
• The agent gets a 6% commission, $12,720.
• Total sales commissions in the 4 year scenario = $24,720.

203K Sale

• Agent works with a buyer who has the ability to purchase a $200,000 home, but chooses to look for a foreclosure for $120,000 and with the Standard 203K loan adds $45,000 in repairs at the time of purchase.
• The buyer’s payment is amortized on $165,000, the home is [because of the improvements] also valued at $200,000.
• The home is not move-in ready and may take longer than 30 days to close.
• $120,000 X 6% commission = $7,200.

The sale usually happens within 45 days or less (usually), some take up to 60 days or more to close. The agent sends the buyer a house warming gift and a Christmas card. 4 years later the buyer is now a seller and the agent gets the call to list his/her home. The buyer is lucky to make 6-8% increase in value in the four year period.

• The sale nets the client (now the seller), $43,800 (7% increase in value + the added value of the foreclosure + difference in the payment)
• The agent gets a 6% commission, $12,720.

Here’s a graphical breakdown:

The Tale of the Tape

In our scenario the real estate agent’s sales commission is $4,800 less and the two projects take an extra 2-3 weeks to close when handling the 203K Loan.

The buyers potential rehab profit, value appreciation and payment savings is $29,800 by purchasing and later selling a 203K Loan.

The neighborhood value is improved and pride of ownership is beginning to be restored. The end result of the above scenario is that agents work harder and longer for less money and buyers have the potential for substantial profits being taken from a very negative housing market.

Real estate agents have a choice to make and judging from a most recent letter by NAR they’re seeing the potential, especially as it relates to investors purchasing with the FHA 203K Loan, we’ll talk about that later.

There are literally millions of homes on the market that fit the above scenario. Today’s real estate market has the potential to create the same level of wealth for buyers that it was creating before the financial meltdown. Both parties, buyers and agents, have the potential to cash in on the opportunity.

The question remains, will agents put on their gloves and help buyers take advantage of the potential.