This doesn’t work for smaller renovations that will not sufficiently increase the home’s value. It’s also not the best proposition for borrowers with low first-mortgage rates. If someone has a 5% first mortgage, it makes little sense to pay that off with a 6% or 7% loan.
The contractor needs enough market knowledge to predict the value of the completed house, as well as a working relationship with a good appraiser. “We see problems when the borrower or builder doesn’t clearly communicate the scope of work to the appraiser,” Dimoush says. “This includes big mistakes, like not accurately defining the square footage, or smaller ones, like [getting the wrong] specs for flooring. It’s important that the appraiser knows exactly what needs to be done.”
This type of financing is also used by buyers who are considering buying a home but will only do so if they can borrow enough to make the improvements they want.
Keith Steier, president of Knockout Renovation in Manhattan, finds that a lot of these people don’t actually end up buying, so he now charges a $300 fee for preparing the estimate for them to bring to the bank. “We started doing it about a year ago,” he says. “We get calls for estimates three or four times a week, but a lot of them don’t want to pay the fee. It weeds out those who are speculating or are not serious buyers.” If they end up hiring his company to do the work, he credits the fee toward the job.
There’s often more to credit products than what’s on the surface. With a little creativity, you can learn to use them in ways that bring you jobs you might otherwise have lost, as well as profits you’d never considered.