‘Purchase Plus Improvements’ or ‘How You Can Get a Newly Renovated House for Cheap’

Ryan Coffey
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I jokingly call some of the things Mortgage Brokers do “financial voodoo” because they have some really intelligent methods of making financing work that can seem a bit mysterious to those of us who are… well… not a Mortgage Broker. One of my favourite bits of financial voodoo is called “Purchase Plus Improvements”. It’s nothing new but I don’t see Buyers thinking about it often enough. Essentially, the idea is that if you buy a home, you can tag the cost of renovations onto the mortgage.

“‘So what?” you say? Well, if used correctly this is a life changer for your finances so let me tell you…

So, when you walk into that house that you really like overall but hate one or two details this makes for an easy and affordable fix. Maybe you love the house but hate the flooring, maybe you want to add a suite to make the home more affordable in the long run, maybe you want to (or have to) redo the kitchen/bathroom but don’t have the cash, or maybe the windows are old and starting to get a regular mould around the edges, this will remedy that. You don’t have to put it on your credit card or try to figure out how you are going to pay that big bill when you just put your life savings into the down payment.

Yes, you are still footing the bill long term because like I said, it is going on your mortgage but considering how low mortgage interest rates are these days especially when compared to unsecured debts like credit cards and lines of credit this is really quite attractive.

But financing details aside, here’s why I, as a Realtor, think it’s such a good thing to keep in mind when buying:
Not that long ago, I wrote this post where I talked about how a great way to get a good property for cheap is to look at the bones and ignore the decor, flooring, paint and so on. To be able to visualize change. (Go on, read it. This is the kind of stuff that will help you save/make money in real estate unlike that fluff that shows up in the newspaper every day.) The pattern I see so often is that houses that are shiny and new looking sell for more than houses that aren’t. This won’t surprise anyone but the interesting part is the price difference between two similar properties where one has had some contemporary finishing done versus the one that hasn’t. I frequently see people paying more for a cheaply renovated home that will probably cost them money in a few years when the cheap materials and results of quick labour start to wear out. I hate seeing people waste their money like that.  This pattern goes to the point where the price difference is usually more than it costs to have the work done so providing that the ugly duckling has good bones and adequate potential, you’re farther ahead getting that one in a financial sense. Providing you make intelligent choices about what work needs to be done and what doesn’t. Most people can’t visualize the potential, but if you can you’re way ahead of the competition for finding the best home.

Another important thing to keep in mind is that you’ll get to choose the style, colours, type and quality of the work done to the home. That’s a big thing because your tastes and ideas of what changes should be made are likely to differ from anyone else who puts the finishing touches on a property. Plus, if the previous owner only did that work in hopes of selling the property it’s basically a given that the quality won’t be as good as what would be done by someone who intends to own and live in it for years to come.

CMHC Mortgage Loan Insurance can help you to obtain financing for up to 95% of the appraised value after renovations with only 5% down payment for both the purchase of your home and the renovations.

The details:

  • Available for conventional and insured mortgages.
  • Work must normally be completed within 90 days or the funds will be recalled and applied back to the mortgage.
  • A detailed list of improvements, including a copy of contracts outlining the scope of the work and cost estimates, is required.
  • An appraisal with two separate values will be required: current value of the property “as is” and the estimated value of the property once the improvements are completed.
  • Lender will lend based on the improved value as confirmed by the appraiser.
  • The entire committed amount of the mortgage will be advanced to the solicitor and the solicitor will be instructed to hold back the  cost of the improvements.
  • Once an inspection from an appraiser confirms ALL work is complete and a copy of the building permit (if    applicable) has been received, the balance will be released.

EXAMPLE:
Purchase price: $300,000
Improvements: $20,000
Total lending value: $320,000
Total approved mortgage: $304K (95% of lending value)

Initial advance on closing date is – $285K (not taking into account insurance premium)

Advance upon completion of renovation – $19K
Thank you to Brad Rembold of Sand Dollar Mortgage Corp. for sharing this info with me and for proofreading my ramblings. You can reach him at 250.729.9781 or brad@sanddollarmortgages.ca

Ryan Coffey