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Mortgage programs help buyers who take on fixer-uppers

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. Lesley Becker/Globe staff; Adobe Stock

If it weren’t for fixer-uppers, we’d have never found a house even remotely near our price range in the neighborhood we loved. Any home we looked at as first-time buyers needed considerable cosmetic work — that was pretty much a given — while others, like the one we now own, were downright decaying from deferred maintenance.

That was in 2008, as home prices were just starting to slide into the pit of the Great Recession. In the following few years, the market would be flooded with foreclosures and other distressed properties, as well as the usual crop of dated homes dressed up for Disco Night. But after a six-year real estate boom that has seen sellers up their staging game and investors snap up older houses to remodel and flip — all amid an ongoing shortage of homes for sale — are fixer-uppers still a viable gateway to homeownership for brave buyers?

Given the advanced age of the local housing stock, there are almost always properties for sale that need cosmetic or structural work, said Marie Presti, broker/owner at The Presti Group in Newton and Stoneham. But in Presti’s mind, a home solely in need of cosmetic updates, such as a new kitchen, doesn’t really count as a fixer-upper. She reserves that moniker for homes where more than one major component needs replacing, whether it’s a 40-year-old furnace, a 30-year-old roof, or an outdated electrical system. When a home has two or more of those big structural or functional items nearing the end of their useful life, “that’s a fix-me-upper,’’ she said.

And, Presti assured me, fixer-uppers are still out there. But while purchasing such a home is one way for buyers to get into a desirable community at a more modest price point, Presti said, fixer-uppers in sought-after locations can get plucked off the market quickly, often purchased by flippers — investors looking to buy, fix, and quickly resell a property.

National brokerage Redfin tracks new listings tagged as “fixer-uppers’’ in the Multiple Listing Service, as well as homes with telling phrases (such as “contractor special’’) in the description. By Redfin’s count, only 2.3 percent of Boston-area listings have been fixer-uppers so far in 2019, compared with 2.64 percent in 2018 and 2.86 percent in 2016. In August, there were just 101 fixer-uppers listed for sale in the Boston area, compared with 153 in August 2018.

With much of the region resembling a luxury market — the median single-family sold for $640,000 in August, according to the Greater Boston Association of Realtors — home flipping is a booming business once again. In the second quarter of 2019, there were 511 flipped homes sold in the Boston area, according to ATTOM Data Solutions (meaning they were sold twice within 12 months) — more than in all of 2015 or 2016. But while the median sale price of a flipped home around Boston reached a high of $415,000, flippers also paid a record-high median price of $302,500 to get their hands on them.

Trying to win an offer is stressful enough, said Jim McGue, broker/owner at Granite Group Realtors in Quincy, but bidding against an investor for a fixer-upper can be particularly unnerving for first-time home buyers. “Part of their competition is not going to be people like them; it’ll be someone with more money than they have, who will waive the home inspection with a substantial down payment,’’ McGue said.

Other times, a run-down home in a tony town may be razed entirely in favor of new construction. For example, a three-bedroom house currently for sale in Belmont — listed “as-is’’ for $799,000, or $549 per square foot — is described as a potential teardown.

That kind of pricing might explain why there are still many fixer-uppers out there, said Jennifer Hurley, a broker with Donahue Real Estate Co. in Canton. Some of them even sit on the market, she added, possibly because they’re not discounted enough. “It’s a tough pill to swallow to buy a house that needs a total renovation for just under what it would sell for normally,’’ Hurley said. “I think that might be part of the problem, that those entry-level sweat-equity houses aren’t exactly entry-level when you factor in the purchase price and then all the work that needs to be done.’’

Today’s buyers increasingly don’t want any part of that work, either, instead seeking homes that are completely move-in ready — thereby providing a reliable customer base for flippers.

With prices so high, Presti said, “I think buyers here in Boston are pushing themselves to the limit of what they can afford.’’ And that’s bound to color their expectations, she explained: For the amount of money it takes to get into a home, the place ought to be move-in ready, they reason.

“‘Move-in condition’ to some people means, ‘I don’t have to do anything to fix it up,’ especially to most first-time buyers,’’ Presti added. “And that’s not always realistic in Boston.’’

Ann Marie Fogg, an agent with Coldwell Banker Residential Brokerage in Andover, said people increasingly want a home they can move right into without disrupting — or even interrupting — their busy schedules. “A lot of buyers today, their lives are so hectic they don’t even have time to pick out light fixtures, much less make bigger decisions,’’ Fogg said. What’s more, she said, interest rates are so low that many buyers would just assume have everything done already and wrap the costs into the mortgage, rather than put their lives on hold for the uncertainty and expense of a monthslong renovation. “People don’t like surprises,’’ she said.

When people can’t find something in their price range, McGue said, most end up looking in a more affordable area rather than considering homes in worse condition. “The location is where most compromise,’’ he said.

The National Association of Home Builders found similar behavior in its 2019 Housing Trends Report. Among buyers who had been house hunting for three months or more without success, 36 percent said they would expand their search area, while only 21 percent would accept a smaller or older home.

That’s a mistake, Presti said. She pleads with first-time buyers who feel priced out of the market to compromise on condition, not location. “You can afford a home if you’re willing to put some sweat equity into the home and you’re willing to be patient … and possibly live in a house that’s not 100 percent perfect for you for a couple of years,’’ she said.

That’s especially true of homes that just need cosmetic work, Presti added. “As long as it’s in a good location and most of the structural components are good, the cosmetic components are easy to change over time,’’ she said. Presti pointed to clients who, as first-time home buyers, purchased houses that needed updating on quiet streets. “And they’re happily raising their families there, but they started off without a dishwasher in the kitchen.’’

Meanwhile, clients who insist on buying move-in ready homes generally sacrifice on location to meet their goal. “They end up on a busy street, and they have to move after a few years,’’ Presti said. “And that will cost more money in the long run.’’

For home buyers willing to take on the challenge of a fixer-upper, new mortgage programs allow borrowers to finance not just the purchase price of the home, but also the cost of any practical renovations as well, said Anna DeSimone, author of “Housing Finance 2020’’ and former owner of Lexington-based mortgage consultancy Bankers Advisory.

There are several programs from Fannie Mae, Freddie Mac, the Federal Housing Administration, and MassHousing, but they generally work the same way. Imagine a home buyer wants to take out a $350,000 mortgage to purchase a $300,000 home and put $50,000 worth of renovations into it. The home buyer first gets a quote for the work from a licensed contractor, and submits that to the lender with their mortgage application. The lender then simply asks an appraiser to validate that, after those improvements are made, the home will be worth at least $350,000. Some programs, such as the FHA’s 203(k) loan, require inspections to ensure the work was done as contracted.

Since Fannie Mae’s renovation loan program requires only a 3 percent down payment, DeSimone said, “If you have a person with a great job, they’re making good money, and have fairly good credit, they could buy a $300,000 fixer-upper and turn it immediately into a $400,000 house and only put 3 percent down.’’

Both Fannie Mae and Freddie Mac also allow buyers to use sweat equity for the entirety of their down payment, DeSimone said. For example, if a $200,000 house is badly faded and peeling, and an appraiser agrees that a fresh paint job would bump the home’s value by $6,000, the buyer can get equivalent credit toward the down payment for doing the work themselves. “So you have a painting party,’’ DeSimone said. “You buy the paint, borrow some ladders, scrape the siding, and paint the entire house.’’

While some options, like the limited FHA 203(k) loan, require less paperwork and generally close in 45 days like a conventional mortgage, a full-fledged FHA 203(k) loan can take longer to process, Presti said — closer to 60 days. That can turn off a seller who’s ready to close pronto, but others may not care. “You have to talk to the listing agent and ask them what the seller’s preferred closing date is,’’ Presti said.

In fact, Presti said a renovation loan can actually be a plus in some situations. “Sellers like a renovation loan sometimes, because they’re selling it ‘as-is,’ ’’ she said. While the buyer will still get a home inspection done, it’s only to inform their priorities when it comes to the renovations. And because buyers will pay a premium for move-in ready homes above and beyond the cost of construction (as home flippers’ profits can attest), Presti said, the appraisal process typically goes smoothly.

Best of all, that equity boost is all yours, not an investor’s. Buyers who are willing to take on a couple of big projects over time to land a work-in-progress home in a good location are setting themselves up for success in the long run, Presti said. “They’re the ones who are going to get the equity in the home, not the house flipper.’’

Jon Gorey blogs about homes at HouseandHammer.com. Send comments to jongorey@gmail.com. Follow him on Twitter at @jongorey. Subscribe to our free real estate newsletter at pages.email.bostonglobe.com/AddressSignUp.