203k Financing: good idea?

10 Replies

Being new to real estate investing, I have been learning all aspects of the business.  And when it comes to financing I have learned many things.  Recently I have been introduced to 203K mortgages and was reaching out to the BP peeps to see if anyone has experience with this type of financing.  Is it a viable tool or not?

@Nick Scapellati the 203k loan can work, but it is not one of the first tools in the tool belt I would reach for unless you are a contractor, or you have a family member/best friend who is. As an agent who focuses on 2-4 units in the Chicago market, I have only ever closed one 203k loan. The investor was buddies with the contractor, and the contractor literally had no expectation of making money which is how the deal ended up working. The renovation part is where things typically go off the rails. If you do decide to pursue a 203k, I would recommend doing a 203k streamline loan. 

@Nick Scapellati I completed a HUD203k rehab about a year ago. I still live in the property and love it! I bought the property for 130K, my loan is 168K and I just had the property appraised for 185K! Not a slam dunk by any means but definitely a solid first deal. 

I would definitely take @John Warren 's advice as he is an extremely reputable agent in the area! I definitely agree that the loan is fundamentally flawed because you have to have your entire scope of work afteryour first walk through of the property (you - like me will probably miss a lot). Like most rehabs my scope of work changed a lot - unfortunately that scope from your initial walk through is part of your underwriting for the loan and you have to sign it saying it will be completed. 

I got around this by having my contractor pad his numbers (I used LUke Kotulski from get inland - DM me for details). As you can imagine this was a lot of risk because I essentially signed a document in my mortgage saying I would pay him exorbitant amounts for things. So like @John Warren said trusting your contractor is crucial. 

The best part is the money from your rehab that you dont use gets paid out to you. I made the mistake of having most of this pay down my mortgage ( I would definitely take all cash if I could do it again)  but I did get a check for about $3K - actually paid back from contractor (again trusting this guy is key)

I have some before and after pictures of my rehab on my page! DM me if you need any more info - having a good mortgage broker is also key because this loan is going to take forever between getting quotes and completing all inspections I think mine took about 6 months to close 

@Nick Scapellati I wanted to drive something home here - the FHA 203(k) product is ONLY for primary residences.  The 203(k) gets thrown around a lot and since Bigger Pockets is mostly for investors it will sometimes get confused with something that can be used on investment properties - it cannot.  As mentioned in the posts above is certainly has it's "pros" and "cons".  I feel that the Fannie Mae HOMESTYLE loan is a little easier to navigate AND you can use it on a Single Family Investment Properties too. However, the main strategy that Bigger Pockets speaks to is the BRRRR method. Which is a great strategy for investment property financing. But that strategy won't really allow for the HomeStyle loan either since most of the time we are targeting "off market" properties that need to close quickly. Again, pros and cons to every one of those strategies.

*WHEW*  I know that's 3 different subjects and we can certainly spend an hour on each subject by itself.  Feel free to post anything additional if you would like.  Thanks!

@Nick Scapellati the 203k streamline is a smaller renovation loan. I believe the current guidelines let you use around 30k or less for rehab, and you can't be doing a bunch of structural stuff. Your lender will be critical if you go down this road as there are a ton of different nuances to these loans. Again, I do not really like them although I recognize that they can be a valuable tool in a house hacker's tool belt. 

@Nick Scapellati - I am very familiar with 203k and provide that financing to my clients on a monthly basis. It's a fantastic tool in my opinion...as long as you're working with a lender and loan officer that are both experienced and focused on this type of financing. You also need to involve a good HUD consultant - not all are helpful. And then yes, you definitely need a solid contractor that you can trust, rely on, and have clear communication with. If you have all the right pieces, 203k can be a great tool.

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