Pleasant Valley, NY · Member since 2016 · 43 posts · 4 votes
I currently signed contracts yesterday for a 2 Bedroom, 1 Bath, 800sqft home on .35 of an acre with a detached 1 car garage. My HUD home inspector is scheduled to meet me and my realtor at the property next week. I already know the furnace doesn't work (I have 1 already) and there is a "broken pipe" so the bank said they can't properly de-winterize the home. My real estate agent said she could list the home for 120-125k after I bring the home up to inspection standards with my 203k rehab loan. I'm in contract for 70k. I'm hoping the repairs don't exceed 10k...
I plan on using this property to move out of my parents house(I'm 23), and then using the equity to purchase another property 6m-1yr down the road
Investor · Concord, NC · Member since 2013 · 23 posts · 17 votes
9y
I have just finished a 203k loan on a triplex (242k purchase price 180k in renovations) It was a pain in the butt and took a long time to complete but it was well worth it. We did a full 203k loan, it took us 6months to close on the house due to sellers and the red tape that had to be navigated for the loan. Then another 3.5 in renovations. The long version is for another time.
I would recommend doing a 203k streamline loan. It has a cap of 35k and doesn't have near as much red tape.
To start off you need to get a 203k hud consultant to do a minimum property standards inspection. As far as a full 203k you are not allowed to do any of the work yourself, your contractors have to be licensed, bonded and insured. All their information needs to be submitted to the hud consultant and to the bank. Once you have your final rehab number you are going to have to submit a detailed scope of work to the hud consultant and the bank. The bank is going to look at the work that is going to be completed and then require a percentage over the estimate for a contingency fund. If you have money left over at the end you are allowed to submit a change order requesting the remaining funds be used for something else.
During the renovation when a percentage of the work is completed you will have the hud consultant come out and evaluate a portion of the work was completed. After the inspection you submit to him how much you want to be reimbursed for, that will go to the bank and the bank will cut you and the contractor a check (third party check). The bank holds back 10% from every draw until the final inspection then all funds are released.
I hope this sheds some light on the 203k. If you have any specific questions I'd be more than happy to answer them
Investor · Pittsburgh, PA · Member since 2015 · 1k+ posts · 1k+ votes
9y
@Benn Albrecht Make sure that CMA is accurate and the homes that have sold are very comparable to yours and very close. The closer to yours the recent sales are distance wise the better. Also make sure your accounting for all repairs. I would have a home inspector look over the home. prepare for the worst especially when you can reinstate some of the utilities. if the homes ARV is truly 120k and you are buying for 70k then even if it needs 30k of work you are doing very good for yourself. my concern is make sure the value is indeed 120k and the repairs are accurate.
Investor · Concord, NC · Member since 2013 · 23 posts · 17 votes
9y
I have just finished a 203k loan on a triplex (242k purchase price 180k in renovations) It was a pain in the butt and took a long time to complete but it was well worth it. We did a full 203k loan, it took us 6months to close on the house due to sellers and the red tape that had to be navigated for the loan. Then another 3.5 in renovations. The long version is for another time.
I would recommend doing a 203k streamline loan. It has a cap of 35k and doesn't have near as much red tape.
To start off you need to get a 203k hud consultant to do a minimum property standards inspection. As far as a full 203k you are not allowed to do any of the work yourself, your contractors have to be licensed, bonded and insured. All their information needs to be submitted to the hud consultant and to the bank. Once you have your final rehab number you are going to have to submit a detailed scope of work to the hud consultant and the bank. The bank is going to look at the work that is going to be completed and then require a percentage over the estimate for a contingency fund. If you have money left over at the end you are allowed to submit a change order requesting the remaining funds be used for something else.
During the renovation when a percentage of the work is completed you will have the hud consultant come out and evaluate a portion of the work was completed. After the inspection you submit to him how much you want to be reimbursed for, that will go to the bank and the bank will cut you and the contractor a check (third party check). The bank holds back 10% from every draw until the final inspection then all funds are released.
I hope this sheds some light on the 203k. If you have any specific questions I'd be more than happy to answer them
Investor · Atlanta, GA · Member since 2017 · 174 posts · 104 votes
9y
@Jared Reutter, thanks for the process details. I am talking to a mortgage broker for a full 203K loan as well. He mentioned the closing cost will be 4% of total price (purchase + renovation). Is this consistent with your experience? 4% of ~ $300K-400K is a lot.
Pleasant Valley, NY · Member since 2016 · 43 posts · 4 votes
9y
I have a friend that is a contractor. What do you think about using him, do the work myself, and have him sign off on it ? Is there anyway that wouldn't work ?
I currently signed contracts yesterday for a 2 Bedroom, 1 Bath, 800sqft home on .35 of an acre with a detached 1 car garage. My HUD home inspector is scheduled to meet me and my realtor at the property next week. ... My real estate agent said she could list the home for 120-125k after I bring the home up to inspection standards with my 203k rehab loan. I'm in contract for 70k. I'm hoping the repairs don't exceed 10k...
Why is this sounding backward? You signed contract prior to completing property inspection? and don't have a firm idea what total repair cost will be or expected profits? You are hoping repairs don't exceed $10,000? hoping? Before making grand plans on equity use, you want to be sure the project will be in the money.
I'm curious on how the details of this type of loan would affect the BRRRR concept.
So, using ballpark numbers, for example; Buy a house for $75k, say it needs $20k in rehab and that gets you to a listing price of $125k. Your all in cost is $95k ($75+$20)
The brrr concept is that the individual does the work. So, you go to Home Depot and buy $3k in flooring and do it yourself. With the 203K, a contractor does the flooring and charges you $5/$6k, maybe more. So if the $3k in new flooring adds $8k to the value of the house. You only 'realize' $3/$4k because the contractor takes his/ her cut.. so then, the 'sweat equity' that you can put into the house is marginalized, right..?
Pleasant Valley, NY · Member since 2016 · 43 posts · 4 votes
9y
@Jay J. I don't think there's a difference if you do the work yourself or hire a contractor, it's just going to cost a little more. The strategy should still work ??
@Benn Albrecht Right, I'm not saying it wouldn't work. But on the back end of the brrrr, you need to refinance.. and that refi needs (ok, doesn't need, but) to fall inline with the requirements of whomever is giving you the new mortgage. When someone does the work themselves, its gives them a bigger profit margin to work with and adds flexibility at the end when its time to refi..
Back to the example.. if you can do the work for the $20k, you're fine. Because being all it at $95k, you can still refi and not pay pmi. ($95k is 75% of $125k) But if the $20k worth of actual product costs you $30k with a contractor, your all cost is $105k. Now your math doesn't work because $105k is +80% of $125k and you've gotta pay PMI. Not to mention it effects the rent math too..
So yea, the 203K is great and can totally work, (I'm trying to use one myself) but it just changes the math a little..
Pleasant Valley, NY · Member since 2016 · 43 posts · 4 votes
9y
@Jay J. I wouldn't add the cost of renovations to a 203k until I am more experienced. Right now I am just trying to get the property up to inspection standards (Heat and Plumbing) the rest is all personal preference.
Pleasant Valley, NY · Member since 2016 · 43 posts · 4 votes
9y
@Abhishesh Acharya That's correct, with an fha style loan there is a 6% cap on how much closing costs you can roll in. I could only roll in $4,200 (6% of $70,000)
Investor · Atlanta, GA · Member since 2017 · 174 posts · 104 votes
9y
@Benn Albrecht, so it was 6% of the purchase price and not the closing cost. My lender is saying 6% of the closing/prepaid cost. Thanks for your input man.
I definitely agree to shop around for 203K lenders as 203Ks are tricky and you want someone experienced in them.
You can't just look at the bottom line for closing cost estimates because they are just that: estimates. Your title company decides a lot of the fees, so perhaps the first guy was being more conservative, while the 2nd guy was removing a lot of fees that should be in there just in case (for example you need a second/final inspection) or changed the closing date to the end of the month, which greatly reduces the pro-rated interest and insurance you pay at closing.
Investor · Concord, NC · Member since 2013 · 23 posts · 17 votes
9y
Finding a 203k lenders is tricky, well ones that actually know how to do one that is.
They bank wanted 3 months of reserves. We had the closing cost rolled in (at 3% and it was enough to cover everything). We ended up getting part of the money gifted to us before closing, we told the bank this and before we closed they essentially gave us a number of what had to be in the account for us to close.
With the extent of work required the bank rolled 6months of mortgage payments into the loan. Which pushed us over our DTI. We spoke with our contractor and they told us they could do the renovation in 3 months. So we got a letter from them to give to the bank and they dropped the rolled in payments to 3 months.