203(k) vs. hard money lender for BRRRR

8 Replies

Hello, really new to BiggerPockets so if this topic has been discussed already then my mistake. Why use a hard money lender over a 203(k) loan when purchasing a fixer-upper? If the hard money lender lends at 12% interest and the 203(k) lends at 5% interest, it seems to make more sense to use the 203(k) initially and then refinance into a conventional loan in the same manner as you would if using a hard money lender. The only downside I can see to this is that you would have to live on site until the refinance due to the requirements of the 203(k) loan.

One big thing to consider is that with the 203(k) loan you have to jump through a lot of hoops. You have to use specific contractors, the bank has to check the work and approve it, and then they will give a draw check to pay the contractor. Because you are dealing with a bank this process usually moves very slowly and your contractors don't get paid on time and the project ends up being very lengthy. With hard money you get ease of transaction and quicker timelines for your draws - usually after just showing the receipt. That comes with a price of course but makes your life easier. I would say to be prepared for frustration if you go the 203(k) route, but with that being said it can be worth it for the low cost!

Hey Joseph!

As Blake said, you're paying for the convenience of time with hard money vs 203k. Since you're able to complete your rehab in a quicker time frame with hard money, you don't have to pay as high of holding costs - most of the time by several months!

Hope this helps!

@Joseph Belgrad

Time and hassle

I’ve never heard of being required to use pre-approved contractors for. 203k. I know you have to use one registered/licensed (depends on what your state has) contractor who is this the GC. So, what you might save in interest payments, you lose in a GC fee... as stated, there is much more paperwork required for a 203k BEFORE the mortgage commitment so that can jeopardize your deal. While I haven’t done one, this is the part of “approved” contractors because you need one who is responsive and knows how to put together a detailed estimate.

With a hard money lender, you are paying a higher interest rate to be able to probably close ina fraction of the time, and not have to deal with and independent inspecotr (whom you have to pay for) to approve the payments from the bank to your GC, and you can GC your own job and get things done at your pace

@Blake Dailey

You have to jump through a lot more hoops with a hard money lender if you’re inexperienced.

A MUCH larger down payment, high interest rates and holding costs, and typically, in current market conditions, they won’t even use you unless you’ve done a few deals. If they do they’re going to be crushing you on their terms.

The 203k is well worth it if you just have the right foundations in place.

Spend the extra time building a team of professionals experienced with the loan. An experienced 203k lender, contractor, and hud consultant will ensure the process goes much smoother.

Reason the loan gets a bad rap is because too many lenders out there say they can do it just to get the business, but then when they get into the loan they realize they have no idea what they’re doing and it makes the borrowers experience tougher.

For a first time investor, the 203k is a great option vs. Hard Money. The reason why is there is up front checking on ARV by the lender, up front forecast of ARV rents and lender oversight in the form of the HUD 203k construction consultant. Yes HUD Consultant charges $500 to $1000 to prepare a Specification Of Repairs report. That report defines code violations that need to be fixed, what the buyer wants to do and then has a forecasted cost BEFORE the loan is ever approved, giving the buyer an off ramp should the numbers not work. Then HUD Consultant inspects Contractors work before authoring lender to release funds, by wire, direct to Contractor for speed. Checks were used years ago, not today. Yes the Contractor does need whatever local licenses by city or state, does need Liability insurance for Buyer protection and lender does a backgrounds check. It would be nice to learn if Contractor is a convicted felon or has litigation against him or tax liens where he might be tempted to use your money tp pay a tax lien behind your back ( I have seen it all).
So yes a 203k takes time, we do them in 30 to 45 days. Rates are super low, borrower can also borrow up to 6 months of mortgage payment dollars in addition to rehab dollars, plus we always do at least a 10% emergency reserve of the base rehab budget, and sometime up to 20% if major work. All this protects the buyer is all I can tell you. I have helped many first time buyers purchase and rehab 2, 3 or 4 unit properties with 203k successfully. My blog has many stories you can read or ask me questions.

@Matthew Porcaro  I think you are spot on. Hard money can be much more expensive. But if you find a good deal and don't plan on living in the property it is a good strategy. And that is a very good point about working with professionals with experience with that loan product. I think that is key to save a lot of time and headaches. 

So the easiest answer of all the answers above is they aren't competitors. An FHA 203K loan is for owner occupied borrowers and a hard money loan is for non-owner occupied. They don't cross and you can't get one loan for the other property.