Home Buying/Selling Specialist: Equity - New work-for-equity requirements

Equity - New work-for-equity requirements

Well, we recently got caught in another regulation change on our way to closing. Are you aware that there are new work for equity requirements? Do you even know what that means?

We do a lot of lease to own contracts for selling. We buy homes and put tenants under lease to own because they're unable to get traditional financing. We work on their credit and give work for equity credits to help them raise their needed down payment. That's been working beautifully for years. As with everything else in the 2010 finance regulations, new requirements!

1.  For existing construction, which is generally our area: only repairs or improvements listed on the appraisal are eligible for work for equity. Any work or materials not included on the appraisal are not eligible.                                                          equity. new work-for-equity requirements

OK, so here's the problem. What appraisal? This means that, before I put a tenant in with work for equity opportunities, the lender wants me to get an appraiser to look at the work they will be doing and set a price for it. Ugh.

Then, the appraiser must look at it after the work is done to confirm the work and the value. Ugh.

2.  For any new construction, the sales contract has to list the work for equity work to be performed by the buyer so that a value can be assigned and confirmed.

3.  On the borrower's side, guidelines state that "the borrower must demonstrate his/her ability to complete the work in a satisfactory manner."  Um, is that left up to someone's interpretation? Ugh.

4.  "The lender must document the contributory value of the labor either through the appraiser's estimate or a cost-estimating service."  What's a cost-estimating service? Ugh.

5.  Here is what they list as the things that may not be included in work for equity: delayed work, clean up, debris removal and other "general maintenance".

OK, a few problems with this sentence. (How do I know that..?) Clean up may not be counted? Have they ever seen the way we buy some of these houses? We recently spent over $3000 at the dump for a house we bought just getting rid of the personal possessions left behind. Not great possessions, mind you, there were 52 tires in the house. But, nevertheless, "clean up", in my bookkeeping, counts as an expense.

equity. new work-for-equity requirementsAnd other "general maintenance". Someones interpretation?  Ugh.

We spent over $6000 on interior paint. Warning, the lender may not allow it. This fell into a gray area - is it a repair, or is it cosmetic? "You have to be kidding me!" They are not. Beware, paint may not count toward work for equity.  Ugh.

6.  Cash back to borrower is not permitted in work for equity. Fair enough. Thanks for the warning.

7.  Compensation for work performed on other properties may not be allowed toward the property being purchased. I can live with that one.

8.  If the borrower furnishes funds and materials, the borrower must provide evidence of the source of funds and the market value of the materials. They must turn in all receipts to the lender.

9.  One of the things not on the list is monthly credits. We give monthly credits toward purchase when we receive on-time payments. Well, if our rent is not high enough, that is not allowed. For example, the lender determined the average rent in one of the neighborhoods we are in to be $1200. This neighborhood has everything from apartment complexes to $500,000 homes. (That's the first problem with their chart.)

At any rate, if we want to give $200 per month credit toward purchase, we must charge at least $1400 per month in that particular neighborhood or its disallowed. That works great for the larger homes in the neighborhood;it will not work at all for the small homes. The credit allowed is based on the lender's charts, not on the individual house value or sales amount. Ugh.

Just thought you may want to know as sellers are doing more and more to help buyers qualify for purchase. I understand the lender's perspective, they want the buyer to have REAL skin in the game and I agree. However... with all the vacant and, often times, trashed homes on the market, you'd think the lenders would lighten up on the roadblocks.

I still love what I do, but more and more often I hear myself say, "Ugh."

Karen Rittenhouse | www.JKKPropertyInvestors.com | 336-834-0614 | karen@karensperspective.com
Comment balloon 14 commentsKaren Rittenhouse • February 05 2010 09:05AM


UGH! is right!  I've got one who is looking to sell theirs on a work for equity as we cant seem to get it sold by traditional methods right now.  Hopefully basement finish still counts?  Off to do more research...

Posted by Joel Weihe, Helping you to use your VA home loan benefits (Realty World Alliance) over 9 years ago

Might be a good time to get an "appraisal" for the amount of credit you can give for the basement and any other work that needs to be done.

Good luck.  Please let me know here or on my blog, www.Karensperspective.com, what you find out.  This is a new area we will all be learning together.

Posted by Karen Rittenhouse, Real Estate Investor (www.JKKPropertyInvestors.com) over 9 years ago

Nice post Karen!  Thanks!  UGH is right.  You make a lot of great points which begs more questions.  Does the buyer need to be a licensed contract to be eligible to do the work?  How do you calculate the value of their labor?  Would it help to get quotes from contractors?  What if the "clean-up" issue presents a safety hazard is not cleaned-up?

Posted by Ed Gillespie over 9 years ago

Karen, thats scary. Fortunately I have not handled one of those to have to go through the headaches.

Posted by Ted Tyndall, I will help You find the Home YOU want to Buy (Davidson Realty Inc.) over 9 years ago

Ugh. More and more regulation makes me want to seriously consider McDonalds, or some other low stress environment. Thanks for sharing. Depressing, but thanks for sharing.

Posted by Joseph Keech (Blue Atlantic Properties) over 9 years ago


I am enlighten--- was not aware of the work for equity concept. Thanks.

Posted by Lorraine or Loretta Kratz, Certified Negotiation Consultants (Crescent Moon Realty, Inc. & Land N Sea Auctions.) over 9 years ago


The statement from the lender was that the buyer needs to be qualified to do the work.  What?  They don't need to be a licensed contractor (depending, I suppose upon the amount of work to be done) but who decides "qualified" or not???  So much left up to interpretation is a very bad thing...

I don't know how they count buyer's labor, just a contractor's labor.  Labor vs. materials does need to be designated.

Yes, you should definately get quotes for how much the work would be before rather than guessing.

If clean-up is a safety hazard?  As with everything else, lender's descretion.  Ugh.

Posted by Karen Rittenhouse, Real Estate Investor (www.JKKPropertyInvestors.com) over 9 years ago

Thanks Karen, I ws not even aware of the sweat equity aspect. I need to do some research on that.

Appreciate your sharing this information!


Posted by Jerri McCombs, Hendersonville NC Relocation (Hendersonville NC Relocation) over 9 years ago

Sweat equity and rules for it.  Thank you for putting out this infomation.

Posted by Christine Donovan, Broker/Attorney 714-319-9751 DRE01267479 - Costa M (Donovan Blatt Realty) over 9 years ago

There just can't be a one size fits all solution to any problem, particularly where, as you explain it, there are so many variables.  Great post, thanks for the info! :)

Posted by Laura Giannotta, Your Realtor Down the Shore! (Keller Williams Realty - Atlantic Shore ) over 9 years ago

Hi Karen - Great blog post!  The reason the lenders won't lighten up is because of the federal reserve.  The federal reserve is buying most of the mortgages today from Fannie Mae/Freddie Mac and these guidelines are in place.  As soon as we go back to selling mortgage backed securities to the public I think we will see guidelines loosen up and creative financing start all over again. 

Posted by Nevin Williams, Senior Mortgage Advisor (Fairway Independent Mortgage Corporation) over 9 years ago

Karen: The need and scope of the paper trail is becoming endless.  Details and interpretations of them are sometimes purely ludicrous.  Guidelines are changing endlessly.  But yet we professionals are supposed to know all of them, understand them completely, and be capable of following them on someone's whim.  Easy to understand why any real estate professional is struggling with each of their deals and customers no longer enjoy the process of getting into a home.  The issues arising with sweat equity is a perfect example of why that's the case ...  Good luck getting this resolved ...


Posted by Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi, 708.921.6331 - 40+ yrs experience (NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656) over 9 years ago

Nevin:  Yup, Fannie & Freddie have a ton of loans, most of them bad so they're broke. Now, they're giving a lot of the loans back so the original lenders are coming after the sellers who received shorts and work outs.  The lenders have 5 years to go back after monies that were forgiven and then their judgments last for 20 years, interest accruing.  Hang on, America, it's going to be a bumpy ride.


Gene:  I wish there were new regulations.  If there were new regulations we could learn them and follow them.  But there aren't.  All the regulations have "dissolved" and we're left to the mercy of whoever picks up the phone or the loan documents and their interpretation.  The banking business has gone nuts.

Posted by Karen Rittenhouse, Real Estate Investor (www.JKKPropertyInvestors.com) over 9 years ago

Karen:  I think we're speaking of the same problem ... there are so many rules ... so many regulations that no one ... not even the underwriters or the END-lenders they represent know and understand them.  It's left for the individual you're presently speaking to to interpret ... and they are under the gun and microscope so minutely that they almost always tips the scales on the side of extreme caution, i.e. ludicrousy.  At least that is what I see happening from my end of the transaction.  They're running scared ... so they double and triple the documentation and "hoops of fire" you need to jump through.  Sometimes when you get someone picking up that phone ... you have a little luck ... too often you get a personal interpretation that lacks any common sense.  My sympathies on this ordeal you are facing ...


Posted by Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi, 708.921.6331 - 40+ yrs experience (NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656) over 9 years ago