Rehabbing to suit yourself


Standing in black pants, shirt and tie, Ken Cohen looks like a trespasser in his soon-to-be rehabbed home.

With its guts ripped out and with wood studs going up for framing, the house on a corner of Dillon Street is better suited to those wearing construction boots and tool belts, just like the guy who's preparing a natural gas line under what will soon be the kitchen floor.

But standing around is just how Cohen, a pediatric oncologist on his way to Johns Hopkins Hospital, plans on rehabbing his house.

Cohen specializes in brain tumors, but this is beyond his healing skills.

"Frankly, I have no delusions of participating in a renovation," Cohen said. Rehabbing a house means different things to different people.

The standard stereotype is of an urban pioneer, grabbing the remaining daylight hours after work to rough in a wall or install a window, virtually living in a construction site that perhaps one day may become a livable house.

In such cases, just as important as having a knowledge of tools, is having a risk-taking gene that gives one the courage to undertake such formidable tasks as righting a sinking floor.

Actually, the rehabbing process can be as customized to the individual as the houses themselves. According to lenders, builders, contractors, real estate agents and homeowners, anyone can do a rehab as long as there is a solid plan, flexibility and the understanding to expect the unexpected.

At a time when mortgage rates are at their lowest point in almost 40 years, the urge to jump into a rehab project may be more tempting than ever.

But before making the plunge, the first question that has to be answered is: Why put yourself though months of orchestrating a renovation project when there are a number of recently restored homes already on the market in Baltimore City?

According to those who are in the midst of their own projects, the decision to oversee the rehabbing of a home has to be based on a person's idiosyncrasies and finances.

For the past 10 years, Cohen has been renting comfortably in what he calls "condoland" in Fells Point. Yet, he has always toyed with the idea of buying a house.

When his rent increased, his dreams started turning into reality.

But Cohen was determined to get a house to suit his needs:

He wanted a rowhouse in a safe neighborhood, with an extra-large living room big enough for entertaining, as well as containing his baby grand piano. It also had to have lots of recessed lights, enough wall space to hang his art and a garage.

Unsatisfied with rehabs for sale, Cohen was enticed into going the rehabbing route when a builder claimed she found the perfect place: a dilapidated corner building in Canton.

"I knew I was going to have a lot of input into the design, and I'm sort of a visual person," Cohen said.

For others, rehabbing is a matter of daring to dream big, while bowing to financial realities.

It took Paul Wrzesinski, a manager at Costco Wholesale Club, a year after he bought his great aunt's Canton rowhouse for $70,000 to feel he was financially stable enough to borrow another $72,000 to rehab his house.

While sweeping the floor, which was to be spared demolition, the nervous Wrzesinski looked like a parachutist about to take his first jump. Wrzesinski was waiting for Dave Carey, a loan officer with Equitable Trust Mortgage Corp., to show him a few rehabs in progress so that he could get a better idea what he was in for.

Carey says that taking clients on tours through rehabs isn't part of a loan officer's job description, but as someone who has taken on four rehab projects himself, he can relate to a rookie's apprehension.

Carey wanted to make sure his client was ready to accept his aunt's house reduced to a skeleton of walls, floors, ceiling and dust - lots of dust.

'Very powerful sight'

"That's a very powerful sight when you walk into a gutted house," Carey said. "It's hard to see it as the finished product."

Carey is blunt with his clients. He tells them there will be headaches, but they will forget about the troubles on the first day they walk into their renovated home.

During a tour of three renovation projects, Carey took on the role of interior decorator, telling Wrzesinski the difference between vaulted and tray ceilings. He told him the advantage of turning plumbing stacks into closets. He was able to show him what some drywall and some well-placed inset lighting can do for a 100-year-old rowhouse.

By the last stop, Wrzesinski, more at ease, was itching for his contractor to get started as Carey hammered home the point he had been making all along:"[Is the] little bit of decision-making, the little bit of headaches you have, worth the $80,000 equity and having the house exactly the way you wanted it - with the tile you want, the carpet you want, the cabinet you want and the appliance you want?

"Is that worth it? I can't see how anyone says it's not."

Hire? Or do it yourself?

Other than money, nothing plays a greater role in determining the successful outcome of a project than the contractor.

"I think it's critical," said Charleene Doverspike, owner of Elegant City Homes, which does high-end rehabs in East Baltimore.

"Whenever I hear a bad contractor story, it's generally people who don't do their homework. Someone who is great doing additions in the county may be terrible in the city. It's a dirty, nasty work. You're working in a box."

The contractor not only lines up the subcontractors, the demolition crew, the carpenters, the plumbers, the electricians, the drywall crew, but also secures the construction permits from the city and works with the lender's inspector, who has to sign off on each portion of the project as it's completed.

Experts in the field recommend that consumers check out a potential contractor's credentials. Make sure the person is a licensed contractor. Visit prior homes done by the contractor and talk to those homeowners. Have several contractors bid on the job.

Builder Mat Riemer, owner of Bayside Properties, said he expects potential clients to investigate him by visiting previous projects he has done. Once hired, he said, the homeowner must trust him to make the decisions.

"I tell them, the only responsibility you're going to have is picking out paint colors and ceramic tile or woods," he said.

In order to save money, the homeowner may be tempted to take over the contractor's role.

According to Doverspike, contractors normally charge 20 percent to 30 percent of the rehab budget. For those investing in a home to resell, the contractor's take cuts deep into the small profit margin in rehabbing a house.

Of course, Doverspike said, the homeowner is paying for the contractor's expertise. A good contractor could save 10 percent to 15 percent in what the homeowner would lose in mistakes or taking overpriced bids for a job.

Doverspike said the first-time contractor/homeowner is going to spend a lot of time on the phone searching for crews and slipping away from a daytime job to oversee work at the site.

"If you don't know how to renovate a house, and you don't want to be committed to it becoming your life for nine months, then I wouldn't encourage people to do it, because you can definitely lose your butt," Doverspike said.

Getting financing

The two most attractive loans for people doing rehab projects are Fannie Mae's HomeStyle product and the government-insured Federal Housing Administration 203k loan. Both FHA and Fannie Mae loan packages require the house be owner-occupied, meaning the mortgage can't be used for investors.

Both mortgage products are designed to allow the homeowner to buy the house and borrow money for the renovations.

HomeStyle is a conventional first mortgage for purchase and renovation financing up to Fannie Mae's conforming loan limit, which is $275,000.

Borrowers of all income levels are eligible, and the maximum loan amount is determined by the "as-completed" appraised value of the home.

The 203k program has a loan limit of $239,250, and the down payment is approximately 5 percent of the acquisition and repair costs of the property. The key advantage to the homeowner is that six months of mortgage payments can be rolled into the loan amount, meaning that a buyer wouldn't have to worry about payments while the rehab project is progressing.

"I say they are irresistible," said Therese Poku, a loan officer for Prosperity Mortgage, the lending arm of Long & Foster Real Estate Inc.

The loan is released in stages or "draws," which makes the lender a part of the rehabilitation process. Borrowers must submit a plan on how they intend to do the rehab project. If approved, the mortgage company assigns an inspector who signs off on each aspect as the rehabilitation progresses.

Before additional money can be released, the homeowner must also sign off, setting up what Poku called "a checks and balances system."

"The HUD inspector is a professional, whereas the homebuyer may not have the technical background," Poku said.

Initially, the contractor and crew must begin work with no down payment. But lenders note that contractors should take solace knowing that there is money committed for the completion of the job.

"I would be a little bit leery of a contractor who wants a lot of money up front with no work being done," Carey said.

Red tape complaints

A few homeowners have expressed reservations about the payment plans, complaining about red tape or being at the mercy of an assigned inspector.

"Just reading the requirements gave me a headache," said Scott Englehart, who opted to go at his rehab on Ann Street in Upper Fells Point alone.

Englehart is renovating a multi-family building and is willing to live in the house while he restores three apartments. Acknowledging that he's in for a long process, Englehart said he doesn't want to be on a deadline, knowing that he would have to start paying on a larger mortgage at the end of six months.

Instead he's content to spend out of pocket working on small projects.

But loan officers say all the rules and regulations of the 203k and Fannie Mae programs are in place to protect the homebuyer. Before the loan is approved, the HUD inspector surveys the house, detailing the job and costs for the homeowner, the contractor and the lender.

This can be a reality check for the homeowner who plunges into the process dreaming of luxury appliances and materials only to be reeled in by the loan amount.

For Cohen, it was the realization that he couldn't afford the same intricate fancy brickwork for every side of the house on Dillon Street. Instead he's going with stucco.

For Wrzesinski, it's a decision to put one double door instead of two leading to his balcony or perhaps to finish one of the second-floor bathrooms with a shower stall instead of a hot tub.

Carey recalled getting the somber news after getting a housing inspection for his first 203k in 1994:

"I wanted to have a Rolex house, but I had a Timex budget."

Plan your life

A lot can be done on paper to make life easier for the contractor and ensure that the new home is customized to fit the homeowner's lifestyle, said Doverspike, who prides herself on her interior touches, such as her trademark transoms.

Doverspike recommends homebuyers cut out models of furniture and move them around a scaled floor plan. Some early furniture arranging, she said, will help to lay out lighting, outlets, the venting system, computer and phone lines. She also recommends that homebuyers think about using available natural light by employing skylights and transoms over interior doorways and walls.

"Think about all these things before you start tearing [the house] apart, because it's a lot cheaper to do it on paper than to do it in real life," she said.

Wrzesinski had a hard time imagining that his great aunt's house - a home of stability that he visited as a child - would ever be one of those slick rehabs. That is, until he went on Carey's tour through the world of rehab. There he was, standing in a half-finished rehab, listening to Carey wonder why more people don't rehab houses.

Carey said about a quarter of his loans are for rehab projects. Many are shocked that they've actually completed a house, and most invite him to their housewarming parties.

Wrzesinski smiled.

"I'm definitely going to have a party when my house is done," he said.

How the FHA 203k program works

The down-payment requirement for an owner-occupant (or a nonprofit organization or government agency) is approximately 5 percent of the acquisition and repair costs of the property.

The 203k loan includes these steps:

A potential homebuyer locates a fixer-upper and executes a sales contract after doing a feasibility analysis of the property with a Realtor. The contract should state that the buyer is seeking a 203k loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.

The homebuyer then selects an FHA-approved 203k lender and arranges for a detailed proposal showing the work to be done, including a detailed cost estimate on each repair or improvement of the project.

The appraisal is performed to determine the maximum amount of the mortgage.

If the borrower passes the lender's credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10 percent to 20 percent of the total remodeling costs and is used to cover any extra work not included in the original proposal.

At closing, the seller of the property is paid, and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.

The mortgage payments and remodeling begin after the loan closes. The borrower can decide to have up to six mortgage payments put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab.

Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10 percent of each draw is held back; this money is paid after the lender determines there will be no liens on the property.

Source: Federal Housing Administration

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