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Restoring historic homes
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February 8, 2001: 7:53 a.m. ET
Procuring a historic home is a labor of love; renovating it is a hefty investment
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NEW YORK (Bankrate) - Ever heard of Madison, Georgia? Probably not. It's a tiny town about an hour east of Atlanta, not really on the way to anywhere. What sets Madison apart is that it was one of the few towns in the state that the troops of General William Sherman didn't burn on his "march to the sea" in 1864 in his self-declared mission to crush the spirit of the Confederacy.
As a result, the quaint community has more than 50 homes and structures that pre-date the Civil War. The fictional world of Scarlett O'Hara could have been based on life in homes such as the stately, white-columned mansions that line both sides of the main street and stand as graceful reminders of the past.
Renovating that kind of treasure is a dream come true for many homeowners. But if ever a venture demanded a clear head -- and a big credit line -- restoring an historic home is it. Let's just put it this way -- there are good reasons that people build new houses. We'll take a brief look here at the mortgage, taxes and insurance. If you're still interested, we've provided a list of online resources covering everything from finding a house to finding supports for sagging porches.
Start with an inspection
As you would with any house, the purchase of an historic home should include a thorough inspection. But if your intent is to preserve the original quality of the home, and especially if the house is already listed on the National Register of Historic Places or would be eligible, you might want to consider hiring a preservation consultant or contractor to handle the inspection. It will yield valuable information in terms of the amount of work to be done and the cost, which will play a big part in obtaining a mortgage. If you're thinking of jumping online to find a bargain-basement loan for this kind of purchase, you're out of luck.
"This kind of product is very, very community-centric," said Pete Bonnikson, head of mortgage operations for Internet-based lender e-Loan. "If someone is doing these kinds of loans, they need to be in the community so they can almost see the project going on. It's far from a plain vanilla mortgage.
It's not one someone would do over the Internet." It's also not a mortgage that comes with a bargain-basement interest rate. Bonnikson says it's not unusual for three points or more to be tacked on to reflect the additional risk associated with an older building and the fact that it's a "more cumbersome loan" for a lender to do.
If your community has a historic preservation commission, it should be able to recommend lenders who specialize in these mortgages, as well as restoration consultants to perform inspections.
Restoration loan
If there's a loan that's custom-made for restoration projects, it's the FHA 203K. It allows the purchase of a home that's unlivable at the time of purchase but will be renovated. The loan amount can go up to 97 percent of the value of the home with the improvements. That lets you include the cost of the restoration in the loan.
Qualifications for the loan include:
--The house must need at least $5,000 in non-cosmetic repairs. That includes renovations to make the residence accessible for a disabled resident. There is no maximum limit on the amount of repairs.
-- It must have been occupied at one time.
--The house must be a one-family to four-family dwelling.
--Repairs generally must be finished within six months of closing.
The amount that lenders will provide on 203K loans varies by state, and even between counties, based on housing values. Check with any lender for information on the loan.
If that's the route you decide to take, Bonnikson recommends shopping for refinancing once the structural repairs are finished to try to find a loan with better terms.
Federal grants are generally not available to individuals restoring historic homes for use as a private residence. Neither are tax credits, which may be one reason why so many beautiful old homes are converted into bed-and-breakfast operations. If a house produces income, it's eligible for a tax credit of up to 20 percent of the cost of qualified renovations. It's based on the Secretary of the Interior's standards for restoring historic properties, and it is quite specific. There's more information at the National Park Service site.
Also, it's worth a try to check with your state or local historic preservation office to see if any grants are offered for restoration costs.
Insurance matters
If you're going to make the investment in restoring a historic property, you'll want to make sure that the house is properly insured. While the history of the house is, of course, priceless, it's possible to calculate the value of the restoration and insure for replacement cost if there's a fire or other loss. Bruce Jacobson, a partner in the insurance firm of Pearson, Cronin and Jacobson, Inc., in West Warwick, R.I., has first-hand experience in covering historic properties. He strongly advises owners to do two things: work with restoration craftsmen who will use the proper materials and processes, and document both the restoration and the results. And then, insure to the actual replacement value.
"I have found that if there is a real bona fide attempt to insure the piece of property to its true replacement cost, the insurance company will usually not hassle you on a partial loss," he said. "If you've got a 2,000-square-foot house, you could probably rebuild for $100 a foot if it's 10-to-15 years old, so you'd insure for $200,000. If it's 150 years old, you need to deal with a contractor who's aware of what it takes to repair it. He'll say you're looking at $250 a square foot. If you do this and can validate it, they usually won't hassle you. You've made an attempt to give them premium dollars for value."
In the policy, look for ordinance coverage. Most standard policies will allow an additional 10 percent to bring a house up to current code. That won't be enough to cover ordinances dealing with historic properties, Jacobson said. While historical commissions generally won't interfere with interior renovations that bring a house up to current living standards, Jacobson noted they can be extremely particular about exteriors.
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If you've got a 2,000-square-foot house, you could probably rebuild for $100 a foot if it's 10-to-15 years old, so you'd insure for $200,000. If it's 150 years old, you need to deal with a contractor who's aware of what it takes to repair it. He'll say you're looking at $250 a square foot. If you do this and can validate it, they usually won't hassle you. You've made an attempt to give them premium dollars for value.
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Bruce Jacobson
Pearson, Cronin and Jacobson |
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"Most of the time, historical commissions make you replace with what came out," he says. "On old Colonials with tiny little windows, you can't just go to Home Depot, buy windows and stick those in. You'll have to spend $800-to-$900 to get a millwright to replace the window. You won't be replacing a roof with asphalt shingles; they'll make you use slate that matches what was already there."
It's also important for you to keep your agent updated as you continue your restoration efforts -- and document your efforts. You want him to know the value of the house is increasing, with proof of the materials that were used.
While you'll spend additional dollars to make sure the house is insured for its proper value, you shouldn't be charged extra because of the age. "You don't see too many problems with these places," Jacobson said. "Most are rewired, replumbed and have new heating. It's a labor of love, so the owners constantly take care of it. Sometimes they can be a difficult claim to settle, but it's not considered high-risk."
Thinking of buying and restoring a historic home? There is a wealth of information for you on the Internet. Here are a few to get you started:
The Heritage Preservation Services of the National Park Service offers many helpful features, including these two unique classes:
--From the Roof Down ... And Skin Deep, a guide to maintaining a historic home and this interactive Web class on the Secretary of the Interior's standards for rehabilitation. These apply to buildings listed on or eligible for listing on the national register of historic places.
--OldHouses.Net and OldHouseWeb.Net, two great resources of restoration tips, real estate listings, and all things related to owning an old house. Lots of links to forums, discussion groups, preservation organizations and restoration products and services.
--National Register of Historic Places Kindling: Adventures in Old House Restoration-- Restoration contractor Chris Travis shares his insights on restoring a historic home, and common misconceptions about the scope of these labors of love.
The Advisory Council on Historic Preservation, an independent federal agency that provides a forum for influencing federal activities, programs, and policies as they affect historic resources. Check here for information on Section 106 of the National Historic Preservation Act, which requires federal agencies to identify and assess the effects of its actions on historic resources. 
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