If homes could write singles ads, the pitches written by most distressed Boston-area homes on the market might go something like this:

“I’ve just gotten out of a bad relationship, and what I’m looking for now is just a little TLC. I’m warm, loyal and dependable, if a little old-fashioned. I may be a little long in the tooth compared to some of other studs out there, but I promise I clean up better than any of them.”

So far, many of these poor properties have been looking for love in all the wrong places. Despite a relatively deep pool of potential first-time buyers who’d love to get into the market at a discount, many distressed properties linger on the market, only getting hit on by investors looking for a quick flip.

But recently, lenders and buyers are beginning to take a new look at whether renovation loans – which help incentivize the kinds of home improvement projects and remodeling work that can raise a distressed home’s value – can help play matchmaker.

A look at the recent growth in the Federal Housing Administration’s (FHA) renovation loans program, known as the 203K, tells the tale. Interest in all FHA loans has blossomed over the last few years, so much so that the U.S. Department of Housing and Urban Development (HUD) began throttling back on FHA lending a bit this year.

Renovation loans make up only a small fraction of the FHA portfolio, but their growth has exploded, outpacing overall FHA lending.

A Popular Option

For the 2009 fiscal year, when single-family FHA loans overall were 66.4 percent higher than the prior year, the number of 203K loans nationally almost tripled, to 16,708 from 6,755, a surge of 147 percent. The past two years they’ve shot up over 20,000, with 22,223 renovation loans made in 2010 and 21,092 in 2011.

“We’ve definitely seen interest in the 203K, since we have a number of bank owned properties,” said Kevin Sears, co-broker/owner of Sears Real Estate in Springfield. “It can be a very good tool for someone looking to get a distressed property.”

Some private lenders are waking up to the possibilities as well. New England Mortgage Partners, a subsidiary of Jack Conway affiliated with Wells Fargo Home Mortgage, recently launched a “Purchase and Renovate” program to help attract buyers to the loans. New England Mortgage offers both private and FHA renovation loans.

“We offer a couple different kinds of renovation loan,” through both the 203K program and Fannie Mae, said Charlie Nilsen, Southern New England area manager for Wells Fargo. “We’re really seeing an increasing need for [this product] and it’s mostly for bank-owned properties. A lot of buyers are wanting to use the program to be able to fix up the home as soon as they close on it.” 

Wells, through its affiliates, has done about 500 renovation loans in Massachusetts so far this year, and Nilsen said, “We think there’s going to be even more demand going into 2012.”

Such a loan can be the only way for a non-investor buyer to acquire distressed property – which makes up a considerable share of available inventory in many towns. The reason is simple: To be eligible for government-backed loans, particularly FHA loans, properties must meet certain basic standards of habitability. Such precautions may prevent hucksters from marketing a pigeon coop as a “cozy one-bedroom with stunning rooftop views” during a normal market.

But in the current recession economy, the rules can be a handicap.

Distressed sellers might simply be unable to afford to remedy a problem in order to get a sale done. And liability-fearing banks generally forbid buyers from making any alterations to property they own prior to sale. That means even houses with relatively simple problems brought about by neglect – peeling paint, a snow-damaged porch, a missing stove – often cannot be sold to buyers unable to afford to either buy them outright or put down a hefty cash payment.

Pros And Cons

A renovation loan can help bridge the gap. The appraisal for the property is based on its post-repair value. The difference between the sale price as is and the value of the fixed-up property is the repair budget; estimates of the work required to be done must be made and outlined beforehand, and submitted along with loan paperwork so the appraiser can review the proposed changes. FHA 203K loans will allow for lending up to 110 percent of the value of the post-work appraisal.

Changes aren’t limited to damage control, either: If revamping the kitchen or tacking on a family room will appraise out, renovators are welcome to do that, too. The renovation funds are held in escrow during the repairs, generally with a staged repayment schedule mapped out in advance, and work must be completed within certain time limits.

The loans are not without drawbacks – if the process outlined above sounds like a lot of red tape, it is.

“A lot of times sellers, given the choice, will take the one that’s not the 203K, because there’s lots of extra work and approval,” said Justin Green, broker/owner of In Realty in Dorchester.

And sometimes the savings that can help keep costs down on a normal renovation aren’t available under such programs. While it’s not impossible for the buyer to perform some of the necessary repairs under such programs, banks generally want some proof that the homeowner-to-be has more experience than watching a lot of the DIY Network. Any third parties hired to perform the work must be bonded, licensed and approved – in other words, expensive.

“I have seen some deals that fall apart because of them, because there’s been discrepancies,” with contractors submitting seemingly inflated estimates, Sears said.

Brokers and lenders agreed that the red tape involved also means extra work for potential buyers. In addition to simply searching for the right property, they have to be ready to hit the ground running. A number of inspections and evaluations have to be scheduled in the few weeks between bid and closing in order to plan out exactly what must be done, what they’d like to do and what they can afford.