An actionable primer from an Ypsilanti broker and licensed builder experienced in architectural conservation/restoration/rehabilitation
At the heart of a community are its architectural assets which determine the feel and the flavor of neighborhoods and streets. In my home market, Ypsilanti’s historic real estate are beloved community assets which are essentially unrivaled in Washtenaw County — homeowners and property stewards here would have to go as far as Detroit, Chicago or Toledo to find the comparable architectural gems of the caliber which Ypsilanti enjoys.
Initial ConsiderationsThe first steps in living out your dream of owning and restoring a piece of history is to determine (1) your market, (2) your budget, and (3) your project & its timeline. A broker with first-hand experience in this endeavor will assist in understanding these first 3 criterion, and should also provide insight along the way, eg; They will help you digest your transaction and remind you of your priorities and concerns during points where you feel overwhelmed by the emotional roller coaster of acquisition and negotiation or when your head may be in the clouds; they will share valuable existing relationships with you as far as skilled trades, general contractors, architects, interior designers, lawyers, and occasionally officials who serve with or on building, zoning, or historic oversight departments. Your broker/agent is someone who you should feel comfortable enough to ask all of your questions to, and confident that they will also ask the hard questions that could impact your interest in a property to buy and restore. Your broker/agent will be your primary guide and in situations where they don’t have the answer they will point you in the right direction.
a good salesman will talk you out of the wrong deal and into the right one because he/she knows, believes in, and often owns his/her product. They'll care more about their professional reputation than any one individual sale.
Now that we have the broker, we have a good idea of the market as far as what $ will buy what house. We need to know your budget to understand buying power, market conditions, and transaction terms. Either the Realtor® or the loan officer will generally be able to tell you if you do not meet the minimum financials for a loan pre-approval. They’ll also provide a breakdown of figures to show your down payment and closing costs. You’ll usually have your credit checked and get a pre-approval from that lender who will also know whether or not you’ll need to sell a home first (if applicable) — that will be part of your offer package which will go with your transaction terms later.
In my experience the smaller, local credit unions tend to have the best rates and fees along with in-house underwriting which will allow your loan officer to get technical questions answered and loan conditions cleared faster and easier than a bank/mortgage broker who outsources their underwriting process to some other entity outside of their office. Having a knowledgeable loan officer with easy access to underwriting staff can not only save you time and money, but depending on circumstances it can save your entire deal. As we say so often in real estate, “Time is of the essence.”
You have your down payment, closing costs, and pre-approval all ready; it’s time to find a place. Your budget, and current market conditions will determine what you find and how your sale terms will ultimately look.
Since you’re looking for property for historic restoration and rehab, you may want to narrow your search to focus on new listings and homes built prior to, eg, 1940 — to narrow down the options. If you’re in a seller’s market most of what’s available will be stale or overpriced inventory — don’t be discouraged, just offer market value even if the property is overpriced. Sometimes a seller prefers to list high, this can go to your advantage as a buyer if the market is against you and the property is overpriced since it makes you less likely to need to compete against other buyers for the asset.
A few words on negotiation: The buyer, the seller, both of their agent(s) (if applicable), the appraiser and lender will all need to be comfortable with the agreed-upon sales price. If you’re buying with cash, you don’t necessarily need to involve an appraiser or lender. But if you’re financing for the purpose of rehabbing historic property you may end up needing a renovation or construction mortgage which can finance your rehabilitation repairs along with the property’s acquisition cost. The lender is going to need to see your appraisal coming in with an ARV (After Repair Value) which is in step with the market the property is in — so for example if you want to buy a house for $100,000, and you need to invest $100,000 worth of rehabilitation & repairs, and the appraiser says it will be only $150,000 ARV after all of the work is done — you’re going to have a problem since the lender will need to see all the work to be done at a realistic valuation in totality for them to collateralize the asset. So the $150k example wouldn’t finance — you need the price to be right in order to get the entire job done and completed or you need to pass over the property and find a better option. Your BATNA (Best Alternative to a Negotiated Agreement) is what negotiations are based upon — we’ll discuss BATNA some other time in a separate article on that topic.
During the financing process, the lender will need to review the project bids & estimates along with the appraisal for the property — and then review and verify your builder is in good standing with the state’s licensing bureau, check references from past customers, check their builder’s insurance and/or workman’s compensation insurance are adequate and in good standing, etc. Their builder’s activation package covers all of this and they’ll need that completed as part of the loan process as well. Some banks will allow your Realtor to double as your builder/contractor if he holds licenses and insurances for both (as I do!), and wants the job. Once the property closes and is officially yours, the lender will issue draws to the contractor from the construction/renovation funding — and during various phases and/or after he’s completed the job the lender will send out an appraiser to verify the project is moving along as planned or was completed.
When you come across historic real estate needing a lot of repair and reconfiguration, start off with a punch list of items which you can safely assume need to be repaired or replaced in order to bring the property into good order. When you’re on a tour be sure to take notes and, if you can, kick the tires a bit (flushing toilets, testing lights or furnaces, etc.); I call this a “pre-inspection” and there are many checklists online to help guide you with what to look for. Any items that you and your agent assume needs to be repaired/fixed will go into that punch list which is also called “Capital Expenditures”, or CapEx. Depending on the severity of the repairs needed in the property, you may want to have it inspected by a home inspection contractor, or you may want to hire trades/contractors to inspect directly in lieu of your regular home inspector— since most home inspectors will (in my experience) refer you to trades for any items that seem to be outside code, generally without being able to quote a cure to the problem. If the property’s condition is really bad it’ll be helpful to involve specific trades and builder/contractors right off the bat during your inspection period so that way you’ll have, eg, a master electrician looking at electrical and/or a master plumber looking at plumbing and able to quote their repair/replacement on-site during your inspection period. This route may require a lot of coordination between various tradesmen— but for the purpose of re-negotiation based on your inspection contingency, having detailed bids in hand specifying what needs to be done from actual tradesman is far more valuable than trying to negotiate based on non-binding ballpark estimates.
Spalling Historic Brick
In Michigan at the time of writing this article (early 2019) the state has two separate building codes; (1) the standard new construction code, and (2) the Michigan rehabilitation code. The rehabilitation code is important particularly for historic rehabilitation because it provides more leeway to bring historic properties up to code without completely re-configuring and rebuilding them all new to meet modern new construction standards. For example, on historic brick work: if your historic property has brick masonry walls (often 2 or 3 “wythes”, or layers/rows, thick of brick) in a building built in the 1880s, you should look for matching hand-made historic brick to match the original brick rather than bringing in modern-day brick and modern-day concrete. The reason for this is because historic brick is more absorbent to water, lighter, and more malleable than the bricks currently made today — historic brick and mortar are designed to breathe and expand/contract as the seasons change; so if you were to miss-match old with new, you may ruin your masonry altogether since the old existing brick is able to breathe, expand and contract, and wick moisture while the new brick will not — and this can lead to bricks cracking under the pressure of expansion. Another example: If the property has a bathroom which is smaller or otherwise wouldn’t fit to modern building code requirements (or ADA, the Americans w/ Disability Act) which could stipulate tearing out the bathroom and laying it out differently, moving fixtures, etc — the Michigan rehab code may provide you with exceptions for you to keep your bathroom how it historically was.
If the property needs so much work that you aren’t sure what’s what (eg, “Can I put this kitchen back where it once was?”), or if the property is either partially (mixed use) or totally commercial, or ≥5 residential units you may need to need another expert: Enter the Architect. Especially if you’re relying on the Michigan rehabilitation code, it may be prudent to involve an architect who is familiar with the rehab code as early as you can. He will serve as a liaison between you and the municipal building department, handle any planning and design work that the building officials may require, and sometimes the architect may manage your contractors directly. I’ll stress that the architect needs to be on-board if you’re planning to restore historic commercial real estate in Michigan (since builders may not be able to open project permits without a registered design professional, or architect, to manage and “stamp”, or certify, the project).
By now you’ve found the property, you’ve negotiated a price based on your market conditions, after repair value (ARV), and your subject property’s strengths, weaknesses and defects. You’ve done a “pre-inspection” during a showing tour, negotiated a fair deal for all parties, and carried out inspections and due diligence involving a slew of professionals in order to verify the scope of work and get a good idea of the risks, the costs, and time the work could require. You’re right near the finishing line; the closing. But before you get there, it’s worth making one last request from your seller (if possible) — ask them if they hold any documentation, specifically a title abstract from the home. Title abstracts are these anachronistic tomes of titular transfer documents that will allow you to trace the history of the property through its various owners, uses, trusts, or court cases affecting the property. Abstracts were phased out earlier on when county registrars began to electronically manage titles, but the old title abstracts predating that are still scattered in attics around the country.
After your closing, you can finally pop the champagne… But don’t forget to go to your local historic society or history museum in order to research your property. Every historic asset has a story which involves generations of previous owners, your ownership is only one chapter and searching its history and prior uses/owners is part of the magic. Find that history, preserve it, and make your contribution to it.
Questions, Comments, Concerns?
Don’t hesitate to contact me for all of your SE Michigan real estate needs:
Alexander Munro — 734.272.6612 — firstname.lastname@example.org — www.munropros.com