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.