Seeking FHA 203K advice and market insight for Dallas, TX / DFW

15 Replies

Hello BP.

I am currently renting a home in Plano, TX. My lease ends in March '19, and I'd like to determine the viability of the following "live-in flip" plan from experienced investors and lenders in DFW:

1. Acquire outdated, fixer upper property North of Dallas as my primary residence using FHA 203K loan.

a. New to DFW & no RE team yet, so no complete tear down properties.

b. Look to find best deal during 2018 holidays (ideally close on a home before 2019).

2. Renovate from Jan-March '19. Must move in by April 1. 

3. Depending on the housing market, duplicate process and turn this property into rental or just sell in 2020. 

I have the capital to put a 20% down payment on a nice home, but I'd rather leave as much money available as possible to see where the RE market goes and invest those dollars in other REI opportunities as I build my network and set strong, well-informed target parameters for investment properties.

Thank you in advance to anyone who can provide their insight on the "North of Dallas" market and the feasibility of this plan! 

-Hunter

@Ronald Rohde thank you for the reply. I'd like to look at multi-family as part of my rental investing plan, but this would be a strategy for my primary residence and I'd be looking for a SFR.

When looking from the eyes of a renter in DFW, I see a big gap in rents between a “dated” home and updated homes of the same type/neighborhood. My thought is that turning a dated home into an updated home and living in it for 1-2 years with a 203K loan is a great alternative to either renting or buying with a conventional 20% down loan for my primary residence. 

@Hunter Peterson so there are a few options left in the Dallas side of DFW that you can still do to invest. It's getting more and more difficult but I find deals quite often still (just more in Fort Worth now). 

First off - as mentioned above, you could get a livable condition 2/4 unit and live in it. Most rent-ready or good area 2/4 units are not cash flowing at the prices they are at right now but if you find one in a lower income area and are comfortable living there - then you could have some upside there. 

Other option - as you mentioned above - acquire a property that needs some work and do a bit of a live in flip. This option is a great option if you can find a property where the numbers work well... as I'm doing this right now - after having house-hacked a duplex myself. 

If you're about leveraging someone else's cash - I'd house hack FHA 3.5% down a 2-4 unit - and then move into another primary (or just buy 20% down - up to you) and flip that into a rental. That's just my two cents... because you're essentially getting 2-4 doors for 3.5% down - which is great.

@Hunter Peterson I totally get the SFR desire but if you plan on moving on within a year or two I think the duplex would be ideal. Two units and you will get your renting started off right. You could fix up just one side and live in it. If you don't want tenants next door, slowly work on fixing up the other side and use it as storage until you move out and on to the next project. This would leave you will two instead of one and in Texas SFR typically don't rent for as much per sq ft as a multi family would.

@Ryan Blake @Kenneth McKeown @Ronald Rohde much appreciated. Do you suggest anywhere to start searching for multi-family fixers in a decent neighborhood north of Dallas? It seems like the market is tough out there unless you go way north or certain pockets between Dallas and Fort Worth. 

Are most updated Plano/Frisco SRF's not cash flowing? It seems like there are enough properties build in the 80s and 90s that could earn much higher rents with updated flooring/kitchen/bath set ups. Clicking through Zillow it looks like an older 3/2 in Plano earns about $1,700 a month while the same house that looks great can get up to $2,500 (very rough numbers)

If you truly want to experience a live-in flip, you would close right around the time your lease is up and live in it, during the renovations.  that way you are not paying holding costs + rent.

as others said, the market is slim if you are looking to cash flow it after it's done. if the plan is for this to be your primary residence (for the next two years), then I'd suggest going with the smallest SFR you can live in, saving money for other deals. The Duplex option mentioned is also good, but overall keep your live-in costs to a minimum.

I live here in a house hack of sorts. I would do multifamily & Fort Worth. Nothing in the northern suburbs cash flows at all anymore & the sky high property taxes don’t help. Live in flips are now done for equity not cash flow.

Originally posted by @Hunter Peterson :

Hello BP.

I am currently renting a home in Plano, TX. My lease ends in March '19, and I'd like to determine the viability of the following "live-in flip" plan from experienced investors and lenders in DFW:

1. Acquire outdated, fixer upper property North of Dallas as my primary residence using FHA 203K loan.

a. New to DFW & no RE team yet, so no complete tear down properties.

b. Look to find best deal during 2018 holidays (ideally close on a home before 2019).

2. Renovate from Jan-March '19. Must move in by April 1. 

3. Depending on the housing market, duplicate process and turn this property into rental or just sell in 2020. 

I have the capital to put a 20% down payment on a nice home, but I'd rather leave as much money available as possible to see where the RE market goes and invest those dollars in other REI opportunities as I build my network and set strong, well-informed target parameters for investment properties.

Thank you in advance to anyone who can provide their insight on the "North of Dallas" market and the feasibility of this plan! 

-Hunter

Of course there are exceptions, but for the most part sellers aren't really entertaining offers from FHA buyers. The ability to qualify is tougher, the length of time to get a loan etc is going to take you out of the best investment deals.

Honestly its tough to compete in Dallas with anything other than cash offers.

I personally would look for a duplex to house hack, and realize that it might not cash flow at first, and let the time I live there make it a better investment.

That is what we did, the original numbers weren't the greatest when we bought our first duplex. But we bought at a price point where the mortgage was well within our ability to qualify for a SFH.

That way, if we hated being landlords, we would end up with a house whose mortgage was in line with what we would spend anyways on housing.  ANYTHING we got in rent was a bonus.

Maybe I missed it, but do you have a job lined up in North of Dallas (learn that one or the purists will come after you). If you don’t I would bet you can find a much better deal on the Fort Worth side of town. You are wanting to move to what was one of the hottest real estate markets, it’s going to be harder to find a deal and the competition will be much tougher. Benbrook, Justin, White Settlement may be better areas but I’ll defer to the Fort Worth guys on that.

I’d be surprised if a house that rents for $2,500 sold for less than $400,000 unless it was a burn out.

Good luck! If you’ve got any area specific questions feel free to reach out!

@Bart H. I really like the idea of approaching a fixer duplex like a live in flip SFR. More time to renovate and more flexibility and cash flow opportunity upon sale. I understand FHA qualification and buyer acceptance are unlikely. Do you have any suggestions of local lenders?

Callum Ross I do currently work in Dallas, with my main proximity needs being Downtown, Addison, and the airports. So I’m ruling out Fort Worth and east of DFW airports in terms of my personal residence, but am definitely interested in investment opportunities and building my network and knowledge there.

@Hunter Peterson thanks for posting this subject.  

As far as the FHA 203(k) loan is concerned it's a decent loan but the conventional renovation loan will beat it out by a mile. The benefit to the 203(k) loan is that it can work with a lower credit score and it has a lower down payment (3.5%). But the closing costs are higher and the renovation process is very strict.

The conventional renovation loan does require a slightly higher score and a slightly higher down payment (5% on single family) but it is a lot more lenient on the types of renovations you can do. You can even put in a pool if you like...the FHA loan does not allow anything like that at all.

If you are seeking a multi-family property to renovate they both allow it as long as you occupy the property but the FHA will still only require 3.5% while conventional will be 15% down. It sounded like you would have enough to cover either loan type and that's why I wanted to bring up the conventional option.

Keep in mind under both options you will need to be a mini-project manager.  Moving can be stressful.  So can work.  And renovating.  Not trying to scare you off just want you to know what to expect. 

Tag me if you have any specific questions but here's some quick bullet points on the program:

Other Important Items to Know about “Conventional” Renovation Loans

Maximum – Minimum Purchase/Upgrade Amounts:

Minimum: $5,000 (below this on an exception basis only)

Maximum: Limited to 50% of the “after improved” value

Occupancy: Primary, Second Homes, Investment Properties

Renovation Term:

  • The renovation term for this program is a maximum of 180 days.
  • The Borrower(s) is responsible for the work being completed within the escrow period. If the work is not 100% complete by the end of the Escrow period, loan may implement a .50% (on total loan balance) extension fee that will cover an additional construction term of 60 days. Borrowers will be provided an upfront disclosure detailing this information.

Contractor(s) Acceptance:

  • Loan does not “approve” contractors or refer contractors. A borrower must choose his or her own contractors to perform the needed renovation.
  • All Contractors participating in the Renovation Program must complete a Contractor Profile Report. All Contractors are subject to the lender’s determination that the contractors are qualified and experienced, have all appropriate credentials required by the state, are financially able to perform the duties necessary to complete the renovation work in a timely manner, and agree to indemnify the borrower for all property losses or damages caused by its employees or subcontractors.

Multiple Specialized Contractors:

  • Since this is a limited repair/renovation program, no General Contractor is required. However, A General Contractor will be required on all renovation projects over $25,000. Borrowers are not allowed to complete any of the work themselves as sweat equity.

Loan to Value Calculations:

The original principal amount of the mortgage may not exceed Fannie Mae’s maximum allowable mortgage amount for a conventional first mortgage.

  • Purchase: For a purchase money transaction, the LTV is determined by dividing the loan amount by the lesser of the "as completed" appraised value of the property or the sum of the purchase price of the property and the total rehabilitation costs.
  • Refinance Transactions: For a refinance transaction, the LTV is determined by dividing the original loan amount by the "as completed" appraised value of the property.

Eligible Renovation:

  • There are no required improvements or restrictions on the types of repairs allowed. However, repairs or improvements must be permanently affixed and add value to the real property.

Costs and Escrow Accounts

  • The costs of the renovations will be based on the plans and specifications for the work and on the Construction contract for all of the work requested by the borrower. The renovation costs may include a contingency reserve and renovation-related costs.

Contingency Reserves:

  • Contingency reserves 10 % required for any unforeseen cost overruns that may occur during construction.
  • Unused contingency reserves that were financed into the loan will be applied to the principal balance of the loan. If the contingency reserves were paid in cash, they may be refunded to the borrower.
  • The contingency reserve may be considered as part of the total renovation costs or the borrower may fund it separately. The contingency reserve may be released only if required, necessary, and unforeseen repairs or deficiencies are discovered during the renovation. Unused contingency funds, unless they were received directly from the borrower, must be used to reduce the outstanding balance of the renovation mortgage after all of the renovation work has been completed and the certification of completion has been obtained.
  • The loan is not re-amortized.

Draw Schedule:

  • The program has a maximum 4 draw process.
  • The initial draw can be up to 25% of the total project and can be for materials for the project.
  • The final draw will be at least 10% of the total project as retainage and funds will be released upon receipt and approval of final inspection, Certificate of Completion from Appraiser, signed All Bills Paid Affidavits and Lien Waivers.

Additional Draw Information:

  • Signed Draw Request by borrower and contractor
  • Signed All Bills Paid Affidavit
  • review and approve the draw request and will release funds for disbursement
  • A check will be issued in the name of the borrower and contractor and delivered to borrower via USPS
  • An inspection of work to date will be performed at 50% complete

Change Orders and Cost Overruns:

  • Changes to the initial plan are not permitted unless prior approval. Any work outside the scope of the initial plan is not permitted as the loan amount cannot be increased.
  • If the project encounters cost overruns, those cost overruns will be the responsibility of the borrower to pay.

Renovation Term Extension Fee:

  • .50% of the total loan balance. This is a post-closing penalty charged by the Escrow Administrator to extend the renovation period beyond the maximum renovation term of 180 days in the event renovation is not completed within agreed upon terms.