First Deal - Nightmare 203k Loan - Still Moving Forward!
Hi All,
*WARNING - Long Post Incoming - Will be breaking it up*
So this is a long time coming... I had been waiting to write this once my property was stabilized and refinanced but decided against it as I've been reflecting on this deal quite a bit recently!
So much has happened since I purchased my first house hack two-family back in April of 2019 using an FHA 203k loan. This project has pushed me past any limits I thought I had - financially and mentally. We're (hopefully) about 5 weeks out from completion but I wanted to start to document for others to learn from my mistakes and hopefully knock their own deals out of the park.
Unfortunately, I lost my phone and had no cloud storage so I can't post a ton of pictures yet but I will put a few in here and subsequent posts showing our progress and the state of the property. Additionally, I will be providing weekly updates to this thread until we get our C/O and get our first tenant in with a successful REFI.
So let's get into it!
My Background
I found BP a few years ago and fell in love with the idea of RE Investing and the Podcast. I quickly understood the massive wealth building potential that owning rental properties can offer those that don't have a whole lot of generational money to start. I spent my first year saving for my first rental property which I planned to be house hacking a multi-family property and using the BRRRR method to REFI out the FHA 203k loan after ~6 months.
Admittedly, I wasn't as serious as I needed to be and got analysis paralysis. At the beginning of this year, I decided it was time to take action and actually do a deal.
Identifying & Acquiring the Property
After deciding on a handful of zip codes, my girlfriend and I went out on a Saturday morning to "drive for dollars" and happen to check Zillow once we were in our primary area & to our surprise, we found a small multi-family house a block away from where we were that had just had a massive price reduction (~$100k) so we quickly went over to take a look.
The house looked pretty small but we quickly saw the potential since the second unit is detached essentially giving us the structure of two single-family houses and the units are about 3.5 blocks from the beach in a New Jersey Shore town. We had been speaking with a Buyer's Agent at the time but since they did not help us find the listing I reached out directly to the Seller's Agent and requested a showing. Always leverage the Seller's Agent if you're not working with anyone else on the deal as they get both sides of the commission!
I heard back the next day and was informed that all offers were due by that evening and that Cash Offers were coming in. I scheduled a time to go see the property that evening and frantically called Hard Money Lenders to see if I could finance the purchase since my pre-approved FHA loan would not compete.
Once I arrived at the property I introduced myself to the Agent and the Seller and began walking the property and chatting with the Seller. She was an older woman who had inherited the house from her late father and was looking to sell ASAP as she had another property under contract.
Both units were in rough shape, to say the least, with a ton of deferred maintenance but I saw this as an opportunity for a potential BRRRR and told the Seller as I was leaving that I would be making an offer that evening.
I ran the numbers (using the BP calculator of course) and came up with an offer that I sent over to the Agent that night. I was told the next day that the Seller liked me but wanted to go with the lower all-cash offer.
I was disappointed but happy that I had followed through with taking action on my goal and told the Agent to let me know if anything changed.
-2 Weeks Pass-
As we were looking at other properties, I received a call from the Listing Agent telling me the property had fallen out of contract with the Cash Buyer and that the Seller only wanted to speak with me regarding the remaining offers on the table. I told her I was still interested and went back to the property with a family member to reassess the Rehab costs. I adjusted my offer to include an additional ~$20k discount and sent over the offer.
It was accepted!
The next month was a whirlwind of finding an Attorney, getting a home inspection, hiring a 203k Consultant, getting formal Contractor bids, etc. It was very stressful as the Seller reiterated over and over that we needed to close in 30 days - Ultimately, I believe we did it in about 30 days all things considered.
While going through the inspection, the Inspector noted that there were structural issues -*For those starting out, if you encounter this I would strongly recommend that you stay away from this type of issue unless you're very educated on how to resolve these issues cheaply and timely*
We budgeted another $20k into the 203k loan to resolve these issues and proceeded to close...
Our Consultant recommended a Contractor that he had worked with numerous times using the 203k loan and we honestly could not find someone that wanted to charge a reasonable price and work with the 203k loan so I spoke with the referred Contractor and accepted his bid.
Note: While you should take referrals into consideration, I would strongly recommend that you shop your Contractor in advance before putting a property under contract. Ask for references and call them. Make sure they can handle the Scope of Work ("SoW") you're planning for in your buying criteria. Due to the time crunch, I handled this piece poorly.
The Numbers
- Purchase Price: $370k
- 203k Rehab (includes Draw Fees, Contingency, etc.): $108k
- ARV from Appraisal: $525
Note: This does not include Closing Costs (Title, Attorney Fees, UFMP (Up-Front Mortgage Premium, Inspection, 203k Consultant Fees, etc.)
So closing up this section, I was semi-pleased with our ARV but was looking forward to the project to reduce basis (e.g. not using contingency) and hopefully add some curb appeal to get a higher appraisal on the REFI.
Coming next... the "Rehab"...
