ultimately I would like to get cash from the seller to take care of upgrades. But I understand this is not allowed. Is it legitimate for the seller to hire me and pay me for repairs and upgrades before closing? I am a licensed general contractor. This would allow me to know the work is being done to my satisfaction, as well as being paid for doing the repairs so that I would not have to pull money out of my own pocket. If this is ok... Does it need to be put on the hud?
You can get a credit from the sellers to go towards closing costs to offset that cost. Or why not just ask for a lower purchase price? I understand you don't wanna use your own cash for repairs so shoot for a credit to reduce your closing costs/down payment.
it's a usda loan no money down
We often provide a credit for repairs to be paid to a "licensed contractor" at closing. Buyer then receives payment written to their chosen licensed contractor (you) at closing to complete the repairs. This is a cleaner way to do it. It is not in your best interest to do repairs as a buyer prior to closing on a property (do not do this). If it happened to not close, you just worked for free. Better to negotiate a credit for repairs. Some lenders will allow a credit for repairs to be paid to the buyer directly (starting to happen again), but this was mostly stopped after the 2007-08 crash and many lenders still do not allow this.
The seller still owns the property, so they are still responsible for paying for necessary maintenance and repairs, and if they're willing to hire you, great! I do not believe this would have to be shown on the HUD if it's a seller expense before closing. Even if the requests are written into the contract (which I imagine they would be), it wouldn't be shown on the HUD because the money is not being paid through closing; it is simply a seller expense before closing. There are still a few things to consider.
If there is damaged plumbing or a leaking roof, and it's written into the contract for that to be fixed, the lender most likely will want verification that the repairs have been made or they will not approve the loan. In this case, I would check with your loan officer what documentation will be required. If they are going to need an invoice for work completed, make sure an invoice from you or your company will not be considered a conflict of interest. That may be up to the individual lender's discretion.
If you're just asking for new carpeting or other cosmetic items, then you shouldn't have to document anything for the lender. Either way though, I don't believe the cost would be shown on the HUD.
I'm not familiar with USDA loans but I imagine they are somewhat similar to FHA. With FHA, if repairs are required by the lender because of something noted on the appraisal, the appraiser would just need to revisit the property to verify that the repairs were made. I have had loans where a receipt was requested and other times no documentation was needed. If the repairs are being completed before the appraisal, you shouldn't run into this issue.
@Robert Kenny One thing to bear in mind with the USDA Loan, they can take an extremely long time to close. We were able to purchase our first home/rental property because a previous buyer tried to go with the USDA Loan and ran out of time extensions waiting on the folks at Rural Development, so we were able to scoop it up when it was re-listed. The FHA 203b & 203k programs are a lot cleaner and faster to close.
You didn't mention the repair or the value, generally 3% or less can be made from credits, if the lender is aware of the matter where it is mentioned on the appraisal, repairs may be escrowed at one and a half times the estimated cost of repairs. When a buyer is skilled by profession and meets license requirements the buyer may do work prior to or post closing, the appraiser will then give a final inspection of the work for closing or clearance of funds escrowed. The matter is really up to the lender, the nature of the repair, the value the effect on marketability will be factors for them to allow repairs after settlement.
Prior to closing, a seller may have repairs made, these repairs are not a HUD disclosure unless the repair is part of the contract, then it becomes a closing requirement.
If the repair is noted by the appraiser, repairs can be made outside of settlement and a final inspection by the appraiser will be necessary to set the final value assessment.
These are general secondary market (including USDA) guidelines, but the funding will be up to underwriting as to what they will allow.
If the matter isn't in the contract or on the appraisal, I'd suggest you work it out with the seller outside of settlement. As a GC, simply have a contract for repairs as you normally would, if your seller backs out or the deal fails to close you have the option of filing a workman's/material lien.
If you do work, you will need to provide a lien release at settlement, the seller will need to disclose any work that was done within the time frame allowed for filing liens for title work/insurance and they will need your release.
When I say, work it out outside of settlement, I mean as to amount paid out of closing or POC, not that you do anything without disclosure to your lender. If the contract is reasonable and work isn't more than 3% and you're a GC, work outside closing should not be an issue.
If the job is significant, say 10% of the price and you're getting 100% financing, in essence, you're borrowing your construction fee, that can be an issue as loans don't fund a borrower to increase the market value or sale price. In a period of falling market prices, this becomes more of an issue as you are borrowing sweat equity in a purchase.
If your work is significant, you can have the seller pay for it, do the work, then contract to buy, apply for the loan, have the appraiser assess the value. then close. You'll still need to provide lien waivers. The only way to avoid the lien waiver is to complete work prior to contracting which is after the time allowed to file such liens.
While it is USDA, all RE is local, it's not just the lender having concerns but also the title insurance and settlement requirements. I suggest you ask your loan officer! :)
- First decide what you can do by yourself.
- Make a price list of all your repairs and remodeling before you make offer.
- Check permits.
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