How to buy a Duplex/Triplex with a 203K Loan?

Question

Hello! Newbie here, but have been listening to a lot of podcasts on real estate and i came across an episode about using 203K Loan to buy a duplex, has anyone done this?

If you have, what was your experience with it? I heard on the podcast that 203k loans have a lot of guidelines, and there's also specifically 203k consultants that can oversee the process. Has anyone used the 203k loan to buy a property?

Any information would be highly appreciated!

Jonathan Bombaci · Answer

Yes I've helped alot of clients do just this, they essentially househacked a multi-family and used the bank financing to do the repairs that were required + the ones they wanted. Its basically a bank financed BRRRR which makes it very cool. The bank will give you an appraisal both before and after repairs which is like having a crystal ball. They will lend you up to 110% of the After Repair Value. The difference between the that and your purchase price would be you MAX repair budget. The process is a bit more complicated, it'll take a minimum of 60 days to close, and the loan is a little bit more expensive (I think 1/4pt higher than traditional FHA). The only reason you would do a 203k, in my opinion, is if you can get significant equity out of the deal and be able to refinance it into a conventional loan after a year.

Assuming you know the typical closing process the difference and reason it takes longer is the following.

During the inspection period you're not only bringing in a home inspector ($500-$700 in MA) but you also need to bring in a HUD inspector ($800-$1000 in MA). The HUD inspector is going to be the person that will make the repair list for your contractor and will ultimately be the one disbursing the money to the contractor as the repairs are being made. Once you have that list you then get a contractors to bid the property. Finding a good contractor that is 1.good at the paperwork, 2. does quality work, 3. is financially sound, 4. sticks to the time table, and 5. willing to do this type of work is by far the the hardest part. When we find one of these Rockstars we hold onto them for dear life. Most of the time we're happy when we find one that checks of 3-4 of out of those 5 items. Normally the agent/lender have to step up and help fill in the gaps.

The contractors need to provide a written quote split out by labor and material for each mini-project and submit that to you and the HUD inspector for review. That is a binding contract, and the contractor will not be paid $0.01 until typically 25% of the project is complete. They then request a inspection and a draw, your HUD inspector comes back out and decides if it meets expectations and sends them a check which can take 10+ days to clear. If you know anything about contractors they typically suck at paperwork and they want to get paid up front. Its due to this intense paperwork process and delayed payment that makes finding a licensed and insured contractor to take on the bid very difficult. And the bid will probably be 10% - 15% higher than if you paid them out of pocket due to the extra hastle and also if they quote the electrical will be $4000 and it turns out to be $4500 it's very difficult for them to get the bank to pay the difference which increases the reserve budget that the contractor has to set aside for their buffer.

I always recommend asking your real estate agent and lender how many 203k loans they did in the last 12 months. If you go down this path you want your team to have experience with this. They'll know all the odd little nuances that go along with this product and they'll know the good HUD inspectors and the contractors that will do this type of work.  Also always have you #1 choice contractor come to the property while the HUD inspector is doing the initial specs it makes the communication between them better.

The 203k product is, in my opinion, when done correctly, one of the best ones out there for this community (househack + BRRRR) but it is a very painful process even with the right team in place. Where people always run into issues is if you have someone on your team (agent, lender, contractor) that doesnt know the product well enough. Probably only 10% of the lenders, Agents, and Contractors out there do this type of thing. You need to align your team to fit into that niche if you want to have the best experience (it'll still be a pain though).

Goodluck and let me know if you have any specific questions. Unfortunately my team and I are in MA not CA but I'd be more than happy to consult and help anyway we can :)

Jon

Jonathan Bombaci · Answer

If you can keep the rehab budget under $35,000 then you qualify for a 203k streamline product which does not require a HUD consultant. The close time can be a normal 45 days and the contractor gets paid faster since there isn’t a HUD inspector involved to inspect the work before payment. This works well on a duplex where you want to do cosmetic things like the kitchens, baths, and flooring but don’t need to do anything major.

The other thing we do is find a property that is in good shape except one BIG thing. Like we love the property except the roof has less than 5 years on it, or except it has knob and tube wiring, or needs new siding. Something big that prevents it from qualifying for FHA financing as is. Then we put in a strong offer with the condition that they fix or replace that BIG thing prior to the appraisal. You’re basically financing the work since you paid more for the house but you’re off loading the work onto the seller so you can qualify for the easier loan. This won’t work in a multiple offer situation but it can be a great win/win for those properties that get stuck on the market for a few weeks due to that one large item that scares first time home buyers and inexperienced agents away.

Jean Santiago · Answer

Wow!! Thank you so much for this very detailed response! Based on the episode i listened to on the podcast, the guy that did the 203K Loan really did outline the headaches and detailed guidelines that the 203K Loan has. He did mention that they are "203K Consultants" (they can be searched at the HUD Website), and for anyone looking into using a 203K Loan, to contact these 203K Consultants because they may actually have a list of contacts of Contractors, Realtors, etc. that have worked with 203k Loans before, which hopefully may help with the whole process of buying and rehabbing the property.

Well, this is a real eye opener and it's really good to know the extent of how rigorous the process is for 203k Loans. Like you mentioned, if the whole team is experienced in 203k Loans, then yes, going this route would absolutely be worth it, since the loan can lend up to 110% of the ARV.

But for me, since i am new in real estate and not have much experience at all, what other options do you think i have when it comes to buying a duplex and rehabbing it? One of the main reasons why the 203k Loan sounded appealing is because of the fact that it combines the purchase price and the rehab costs into the whole loan. For someone new like me who doesn't have a bigger pocket (yet), what are my options if i want to buy a duplex at a bargain price, then rehab it? Of course i have to come up with my 3.5% down payment, but where would i get the funds for the renovation costs? Are they other loans like the 203k Loans, but are much less rigorous in guidelines?

Jean Santiago · Answer

I see! So basically if the rehab budget is under 35K, then the 203k Loan would not need a HUD Consultant, which i can see from what you said, maybe a whole lot of less headache when it comes to paperwork.

All these information you just outlined are very helpful to know! At least now i know the options and the key points i really need to consider when it comes to using the 203K Loan.

Thank you so much!!!