203k Loan for Multifamily home: What can we repair, who are the contractors, what are the limits?

Question

Hi All,

I'm back to investigating my owner-occupied quad-plex plan in Houston. I really want to try buying a fourplex with a FHA/203K loan but I don't know much about it.

Are there loan limits for a 203k loan? What kind of repairs are you allowed to do? Can you basically renovate a home Property Brothers style with that loan? How long does it usually take to do that kind of renovation with 203k loan approved contractors? I'd like to start living in one next January so I'm wondering what kind of lead time I should give myself.

Speaking of approved 203k loan contractors, do you seek out an approved general contractor? Or do you have to manage several types of individual contractors like plumbing, tiling, painters, etc?

I know that typically contractors that work with investors charge less than to retail rehabbers... do 203k loan approved contractors charge more because they think you are a retail customer? Or is it still possible to find a good but less expensive contractor who gives you an investor bid because they know you'll be back?

@Brandon Turner

Do/Did you ever go visit MFH's with a contractor to figure out repair costs?

Thanks!

Aaron Brown · Answer

I used a 203k(owner occupant-rehab) loan on a fourplex back in May of 2014. You have to use one general contractor, and cannot use individual subcontractors. The GC can use subcontractors but it all has to go through the GC. before you close on the loan, there is a huge stack of paperwork that you have to go through and the GC has to be selected and finalized and you must turn in the borrowers agreement, signed bid and scope of work, and the GC has lots of paperwork as well.The GC you select must be licensed bonded and insured, provide several references.

A little about my experience-The extra paperwork that the borrower and the GC must fill out for the 203k approval is pretty extensive. I contacted four GC's- up front,  1 declined to bid, 1 didn't meet  licensing and insurance Requirements.  The other 2 bid on the projects.  I selected the lowest bid. After about a month and two closing date extensions,after pushing this contractor and working with 4 different people in the company, I still was not able to get all of the required paperwork turned in. It came down to one last piece of info we needed and they finally decided to back out a couple days before closing. Another extension. I then had to go back to the last GC who was the highest bid. I was able to negotiate a little lower price on some projects, which was good,  but he was still 2-3 times higher than 1st GC On some major projects.  I ended up using the cheaper contractor for some work later, but this I had to pay out of pocket and couldn't wrap into the loan. I also did lots of work myself, but anything on the signed scope of work using the 203k, must be done by the GC you hire.  payment-the bank pays the GC half up front and half on completion when you and the inspector has signed off on the finished work.

My loan application and paperwork approval almost blew up on me due to timelines and paperwork expiring because of all the delays. Luckily even with all the extensions we were able to close on the property Thanks mostly to my very knowledgeable mortgage lender and help from my agent! I highly recommend using a very experienced mortgage lender who has done several 203k loans And can push all parties to get required paperwork submitted.

In the end, it was a TON of work but definitely worth it!  Good luck on your deal! let me know if you have any questions I may be able to help with.

Garren P. · Answer

@Aaron Brown:what lender did you use by chance ? an what GC did you use ?

Wayne Brooks · Answer

It's one loan, and MIP just changed to 0.85%/year.  You need to talk to an FHA lender in your area.

Shawn Mcenteer · Answer

@Tim Shin I am yet to use a 203k loan but I would imagine it is the same pricing and I would also think a 203k loan benefits the contractor and client because of the guidelines in place it should protect all parties terms of clients paying contractor and contractor completing work to FHA standard.

Tim Shin · Answer

Thanks @Shawn M. and @Wayne Brooks ! Shawn, if you want, could you email me your sheet please?

Do you know if the GC's will charge more because it's 203k loan than they would otherwise for an investor? I'm looking at a property that's in need of some MAJOR work and I can't tell how big the units are from the listing. But I think that maybe if they are 2/1's they can rent for 1800 in my area. Does anyone know if using the BP calculator when if you think there is $100k in repairs but those repairs are included in the 203k loan do you just add that to the purchase price and change the repairs to $0 so that they are rolled into the loan instead of OOP?

Also, do you get a regular FHA loan AND a separate 203k loan for repairs? Is it possible they'll have differing rates? I want to do 3.5% down but I know this comes with PMI that may be at a rate of 1.35% of the loan right? So for the BP calculator should I use an interest rate of 6% if I think I can get a 4-5% interest rate?

Wayne Brooks · Answer

Most legit GC's (liability/workers comp insurance, license, etc) can be approved.  Approval is done by your lender, and you'll need a GC, not hiring subs yourself.  You can do almost any kind of repairs/renovation, but the appraisal for the finished product must be at or above your purchase price plus renovation costs.  Up tp $35k is "streamline", and you can go well over $100k of you meet all the parameter

Shawn Mcenteer · Answer

I have a 203k Loan criteria sheet, unfortunately it was sent to me in excel and I am having a difficult time trying to share it.  It was sent to me by my lender.

203k Consultant & Contractors

SWMC must approve the use of all parties involved, including the consultant and contractor as applicable.

This what it says for contractors.  Not sure to what extent this is upheld but for major projects I would follow the guidelines.

I believe the process is laggy because you need to use approve contractors but once it is situated it becomes a standard renovation.  I am under the impression you can use one do it all contractor or multiple contractors.  Your lender should hopefully be able to clarify more and I suggest you google 203k approve contractors in your area and talk to them.  I believe there are stipulations with paying the contractor as well, portion up front and full payment at the end.

203k Loan for Multifamily home: What can we repair, who are the contractors, what are the limits?

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