But you’re crushed when you see the small, outdated kitchen and walk away from the almost-dream property, only to repeat the process again and again.
“You come in, you don’t like the kitchen, you’re going to waste all this time going looking at other homes when this might be the perfect house,” says Laura Parsons, a mortgage specialist at the Bank of Montreal (TSX:BMO).
Canadians feeling a sense of urgency to buy while mortgage rates are low are more likely to engage in bidding wars and overspend or panic and settle for something that doesn’t meet their needs, Parsons says.
” It’s created some excitement in the market and our prices are going up so most Canadians are feeling the pressure: ‘Oh my goodness, ifI don’t get in now, what does the future look like?'” But it doesn’t have to be that way – and one alternative is to buy a fixer-upper for an excellent price and have it customized by the time you move in.
Purchase-pIus-improvement mortgages can allow qualified purchasers to borrow additional money from a mortgage lender to pay for those renovations. Under the plan, a lender takes into account the improvements made by the new owner and gives credit based on the increased value of the property.
Gary Siegle, a regional manager at mortgage brokerage firm Invis Inc., says the program is suited to buyers willing to “look beyond the bruises” and visualize how renovations could transform houses that are often underpriced because they need work.
“People who are looking at this are people who are saying ‘the house I really want is not currently available or it’s overpriced, so here’s another option, I can buy a house that’s the right floor plan and it’s not going to take a lot of work to make it look like the home I was really hoping to get’.” There’s another option for homeowners who want to take advantage of low rates, but avoid the stress of relocating, Siegle says. They can refinance a mortgage to include the cost of renovations or use equity in the home they already own to secure a line of credit.
Garages, bathrooms and kitchens usually give homeowners the biggest return on their investment but a purchase-pIus-improvement mortgage can also be used for anything that adds value to a home.
The plan also benefit sellers who don’t want to waste time and money on renovations before they put their home on the market for someone else to love or hate.
Siegle says its important to remember that buyers still have to pay for the renovations up front with a credit card or savings but will be reimbursed when the renovations are complete. That can be a challenge for buyers with limited funds.
This is how a purchase plus improvement mortgage works step by step:
Step I: Shop around for the best rate on a mortgage pre-approval, which will provide a clear price range.
Step 2: Put in an offer on the fixer-upper, making sure it’s clear the bid is subject to appraisals, inspections and the cost of renovations.
Step 3: Have the home appraised for its “as-is” value, as well as a projection of what it would be worth post-renovations. Also have the home inspected to make sure there are no hidden additional costs.
Step 4: Get written cost estimates from contractors on upgrades. Take the best estimate to the lender.
Step 5: Apply for a mortgage that includes the cost of upgrades. Ifa home is appraised at $400,000 but requires $50,000 worth of renovations, buyers would secure a mOltgage for $450,000, in addition to the minimum five per cent down payment.
Step 6: If the mortgage is approved, close the offer with the seller. The funds for renovations will be sent to your lawyer “in trust” when the mortgage closes.
Step 7: Upgrades, paid for up front by the buyer. Depending on the extent of the work that needs to be done, it could add weeks or months to the move-in date.
Step 8: Renovations are complete. Funding, which has been held back by a lawyer until the work is completed and inspected, is released and the contractor can be paid. If the renovation is more extensive and costly than just cosmetic changes, the advances are staged, meaning buyers receive them in stages as work progresses.
© The Canadian Press, 2010
Instead, sellers may want to make the buyer aware of the option and then negotiate based on time instead of price, with the seller offering to be flexible about allowing the buyer to start upgrades while they’re still living in the home.
