And Now the Purchase Plus Part

April 26th, 2011

Last time we discussed getting a mortgage with little or no downpayment via the “Cashback” option which most lenders subscribe to.

This time we’re going to look at a fairly interesting product backed by CMHC and Genworth for those properties that require a little more than… cosmetic work (or to borrow a turn of phrase from a realtor, more than “put lipstick on the pig”).

You’ll probably see listings with the politically correct term of “handyman special” or “diamond in the rough” or “you and your contractor would really enjoy this challenge”.

Lets say for example you want to buy a run down house. It needs a new kitchen or bathrooms or floors (think interior stuff, not roofs or exterior finishings) or all of the above. Purchase price is well below market value. You know that if you put in $20K or $40K you could get this back to full market value. Structure is fine. Everything is in good shape generally (good bones as some like to say), but the yellow and green toilets and matching fridge and stove colours have got to go.

You get your contractor in to give you a quote on cost to renovate. If this estimate added to the price puts it OVER market value, then you need to negotiate the price down some more.

Let’s say you find a house for $200K purchase in a market where the average is $240K. Your contractor gives you a quote to repair/reno “everything” for $45K.  You have $20K for a downpayment, but you want to use that to pay for the renos.

If we follow the CMHC guidelines, they will allow the mortgage company to offer you a mortgage of $180K + 10% (or $20K) of the purchase price. For those doing the rough math, that’s now 100% financing being offered.

Now, naturally some people like to skip ahead to the end of the story and say what if I don’t do the renovations? To which I say, then the 10% never leaves the lenders pockets. Huh? But they just approved me for the whole thing. Not exactly, they have approved you for $180K and IF you complete the renovations (within a given time frame) and produce the invoices showing you’ve PAID for the reno’s to your lawyer, THEN the lender will advance the final 10%.

That’s pretty cool, but the initial estimate was for $45K. That’s where the “alternative” insurer in Canada comes into the picture, Genworth. Genworth seems to understand that major renos can go up to 20% of the value.

Now this is interesting you say. You put 10% down as your downpayment. Complete all the reno’s up to $40K/20% (on credit, LOC, personal loan, etc. and do a little work yourself or sweat equity). Give the receipts to your lawyer and you get that cash and pay off those outstanding loans.

You now own a home worth (presumably) $240K and have a mortgage to $220K that you bought for $200K. You now have a house financed to 110% of purchase price (or 91% of market value).

I think that’s a pretty sweet deal.

Thinking a little further outside the box. Say you buy a rental and renovate the basement to add an apartment. Your single just became a duplex (or secondary apartment, or duplex to triplex) and you’ve increased the value by possibly doubling the rent. I can’t think of a better way to force appreciation then by adding a unit and increasing the cashflow. AND the lender finances the cost of the conversion.

Wait 5 years, refinance to the value of a duplex (not a single). Use the equity to buy another single with unfinished basement… rinse, repeat.

I’m really not seeing the downside to this method. The lenders don’t even charge a rate premium for the “plus reno” and the CMHC/Genworth premium is dependent upon the original purchase transaction.

And now back to our regularly scheduled programming.

JRW

One response to “And Now the Purchase Plus Part”

  1. walshsurvey says:

    Rinse Lather Repeat and you are on your way.