How to Mix FHA 203K with DIY for the BRRR Method

Question

Hey Everyone !

First of all I want to say a HUGE thank you to everyone who has posted on the forums here. The wealth of knowledge I've already gained reading through other topics on the site is a total game changer.

ANYWAYS

My wife and I are looking to purchase our first multi-family property in the North Jersey area (specifically in Montclair or Bloomfield.) Our plan is to purchase a 2 or possibly 3 unit property and live in one of the units. This will allow us to take advantage of an FHA loan and only have to make a 3.5% down payment.  As we don't have a TON of money saved for renovations we are also looking at using a 203K loan to bring the units up to a $2K/month market standard for a 2bd/1ba. I know there are a few "hoops" to get through with the 203K but I'm fine with jumping through a few hoops for some cash flow.

My question is this: Supposing a property needs a gut rehab or close to a gut rehab, can we hire a contractor using the 203K to handle most of the bigger jobs (roof, siding, plumbing, electrical, drywall, mechanical) and then pay out of pocket to finish the smaller parts of the rehab ourselves (paint, laminate flooring, etc.) ???

We're experienced DIY'ers when it comes to things like paint, laminate flooring and installing fixtures/appliances and want to put more 203k funds toward things we only feel comfortable with professionals doing.

I apologize for the long post but hopefully you can understand where we're at. Any insights or experience would be helpful.

- Riley

Tony Nardini · Answer

Chris is correct.  You can't add your DYI projects to a 203K loan.  The funding is only for what is listed on the contractor's estimate.  While you can add permits and even monthly payments while you aren't living there, this does increase the amount of money that you are borrowing and increasing your monthly payment.

As for finding a contractor that is versed in 203K, it is a little difficult since it is different than a regular job that they are doing.  They get paid differently and the work gets verified before they get paid.  This is done to protect you.  There is also only either 10% or 15% contingency built in so the contractor had better cover everything in his estimate.  This also falls on you as the buyer since if you went with the cheapest person and he missed some things or didn't calculate accurately, you are stuck.  203K requires a bit of documentation from the contractor including his license and insurance as well as references to jobs that he has completed of similar work.

A 203K loan will finance to 110% ARV which can actually help if your numbers are tight.

A 203K loan is an FHA product which means that it requires both upfront MIP as well as monthly MIP.  The UFMIP is 1.75% of the loan amount and is added to the loan.  Your monthly MIP is either .80 or .85% depending on your LTV.

An FHA loan allows up to 6% seller concession so you could purchase a property and rehab it for only the 3.5% down payment.

Either way, a 203K loan is an excellent way to begin because there is not much money that comes out of your pocket.  This allows you to continually save more money for your next property.

I've done a number of 203K loans and I'm well versed in them.  You can always ask me questions about them.

Christopher Veljkovic · Answer

@Riley Moore there are 2 types of 203k loans, the first one is a loan up to 35K$ and the other is a FULL construction loan.  I am in the process of utilizing the first one which is the smaller version, which after all the fees, permits and MISC it comes out to 29.5K$ (if you utilize the full amount).  Now I too am a DIYer, however, my suggestion is to utilize either loan to take care of the big capital expenditures to have that out of the way for the next 15-30 years such as the roof, HVAC, upgrading electrical panels to separate utilities, etc.  That's of coarse if the home calls for repairs as such.  The problem is that when you apply for the 203K you must have a contractor bid on the jobs that is going to be financed through the 203K and you cannot do those jobs yourself because the bank will not allow it.  But that's not to say you cannot work on the home.  You just cannot get money from the loan to finance your DIY project.

I AM NO EXPERT but I am going through this process as I am writing this and my advice and experience so far is that this program is a great stepping stone to begin my journey into my real estate investing, as long as you are patient and organized throughout this process.  My obstacle was getting contractor to bid on these types of jobs because they scope of work/estimate has to have the labor and material separate and itemized, which, contractor are not accustomed too.  The contractors that do these types of jobs are pushy because they know that there are not to many contractor out there and that are willing to go through 203K process.  So be aware of these contractors.

My second advice is to find a loan officer who deals with these types of loans because they can help and guide you through the process and steer you when things get overwhelming or confusing.  But organization is the KEY!!

Last thing is to be aware of the UFMIP (up front mortgage insurance premium).  That one took me by surprise and I'm sucking it up and taking that into account with the numbers now.

Good luck!  any referrals needed  just PM and I can send you my contacts.

Max T. · Answer

Good question for your lender.

Paul Welden · Answer

@Katherine Burke Sounds like you may be over-improving the property or purchase price is too high.

Lenders do not allow DIY projects to be rolled into the 203k Loan, but if the DIY items are NOT FHA required items, then you can certainly do them outside of the 203k.

Contractor pricing may be tad bit cheaper for non-reno loan projects because they don't have to "finance" the project out of their pockets. But the contractor profit and OH will still be there. Maybe do the work yourself and save some real money.

Katherine Burke · Answer

Question, I’m purchasing a four family and there’s a decent amount of required repairs 60-80k worth but I also want to do a nice refresh on each of the units, including mine which I want to do some nicer upgrades on. Unfortunately my contractor quote is likely about 40-60k over what the post appraisal value would be. My 203k consultant wants me to refine this as much as possible prior to submitting for lender review and appraisal. I’m struggling to cut things out of my budget but I’m considering pulling out any of the non-FHA updates in MY unit and then purchasing materials on my own (resale / ikea etc) so I can cut costs, reduce profit / OH costs and ultimately, pick exactly the features I want specific to my unit. Anyone have any experience with this or recommendations on the best things to cut down / out to get the best value on my multifamily renovation budget? My thought for pulling my unit out is because it’s currently about 30-40k worth of repairs + 20% contractor profit/OH + 10 percent contingency. Of course I’ll still need to pay for labor but if paying cash out of pocket I presume there will still be some significant cost savings. Note, I do recognize my contractor will Need to complete all FHA required repairs ie repairing peeling paint etc. Thank you all for your help, need advice ASAP!

Tony Nardini · Answer

Sorry about the spelling errors.  I replied from my phone and didn't check it.

Tony Nardini · Answer

Riley is correct about the ARV. Your agent should be able to pull comps to gi e you an idea as to wbat the ARV would be.

The contingency is added to the entire loan amount.  10% if utilities are on and 15% if tbey aren't.

Example:

200k purchase price.  25k repairs.  3k other fees.  10% contingency

Total is 231k.  The ARV would have to be at least 210k.

Christopher Veljkovic · Answer

@Riley Moore I believe the ARV is determined by the comps sold within your area in the last few months to most recent. The 203 appraiser will have all those comps prior. Not sure if it made a difference but I gave my realtor a bunch of printed comps to hand to the appraiser because I was not able to be there.

Christopher Veljkovic · Answer

@Tony Nardini so if the contractor estimate is $25K, would the 10-15% contingency be automatically financed into the loan?

How to Mix FHA 203K with DIY for the BRRR Method

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