Any Experience with a 203(k) Loan?

Question

Hey BP!

Can someone who has used a 203(k)  help provide some perspective on their experience? Positives? Negatives? Would you do it again?

I know there can be a ton of paperwork and logistical headache...but what the loan offers is pretty unique and seems like it could really be helpful in the right situation.

Any thoughts are appreciated. Thanks so much!

John Warren · Answer

@Brandon Reed I have been a part of three 203k deals as an agent, and only one of them closed. The other two fell apart in escrow. I also have a listing in Berwyn, IL right now where the buyer is doing a 203k loan and they have had to extend four or five times. I personally think the loan product is fine, but you need a bullet proof estimate from a contractor who understands how the process works. In addition, you have to realize that most of our renovations are small potatoes for these contractors when you consider how much paperwork is required. While we as investors think a 40k renovation is a big deal, these contractors can get these kinds of jobs all day with almost zero paperwork. This is why a lot of investors are shocked when they begin getting bids from GCs.

Zack Karp · Answer

@Brandon Reed agreed with what @John Warren said above.  There are 3 critical elements to a successful 203K:

1. Knowing your numbers/the right Realtor

2. The right Contractor who has experience with the 203K process

3. The right Lender AND Loan Officer who has experience doing 203K loans

Brandon Reed · Answer

Thanks so much for all of your replies. This is awesome info and really helpful as we look to make a decision! I appreciate you each taking the time 👍.

Nate Bell · Answer

@Brandon Reed

I did a 203K on my first house, learned a lot and used a similar “Homestyle” loan for another project recently. I disagree with the last response who says that the realtor matters- it hasn’t in my experience. They just need to be patient and know that closing is going to take 60-75 days. The ball is in your court otherwise to put together a scope and get pricing.

I think that the #1 biggest thing you need to do on one of these is have some of your own cash. You might have to fund the start of the project, or the end of the project, or both, until an inspection happens and the bank does a draw for you. If you can’t fill the holes, your contractor is gonna be angry, whether he was told about or has experience with this process or not. Also, doing change orders through the bank is a pain, and they typically only allow it at the end if you have extra money, so if you come across something in the middle of the project, it’s really best if you can just pay the contractor for it directly out of your pocket.

I’d say that for every $100K worth of construction work, you should have $25K at your disposal, or else this is going to be the most stressful thing you’ve ever done.

Paul Welden · Answer

You're only as strong as your weakest link. So, select your partners wisely. Your 203k partners include the REALTOR, Lender, 203k Consultant, and contractor.

REALTOR - should have completed at least 1 education course on the 203k or has completed 1 successful 203k.

Lender - HUD allows any FHA approved lender to do a 203k, even with no 203k education/experience; but it's best to select a lender with a lot of experience with 203k's.

203k Consultant - the lender selects the consultant; this is why it's important to select your lender carefully, b/c the lender is responsible for the selection of the 203k Consultant; to be a consultant, you basically need to be a home inspector with 3 years experience (over simplified) and HUD will put that person on the roster of 203k consultants, without any education, training, or 203k experience; selecting the best 203k lender will usually guarantee you a good 203k comsultant.

Contractor - any licensed, bonded, insured contractor can do the rehab, but that doesn't mean they know the FHA guidelines, paperwork, payment system, processes, or different versions of the 203k; best to select one with 203k education or 203k experience. I've had many successful 203k's and other rehab loans because of working with contractors who have a designation as a Certified 203k Contractor; there's a website for their education, accreditation, and directory at 203kContractors.com.

Select your partners wisely!

Paul Welden · Answer

Please be aware that on most 203k's the contractor does NOT determine the price for the project. The HUD approved FHA 203k Consultant determines the price as well as the items required to be completed to meet FHA MPR/MPS. The consultant's report is done prior to a contractor providing their proposal. Now, if the contractor pricing comes in lower than the consultant's, then the consultant could lower his/her pricing. Point is, anyone doing a 203k who is relying solely on a contractor to determine what's required and the price for rehab, is most likely setting themselves up for many problems.

Joshua Ferrari · Answer

I had an absolute HORRIBLE experience with a 203K loan. We bought a fourplex to house hack. It took over 5 months to close, we finally closed and three months in we had to fire our contractor. (They doubled the budget and tripled the timeline) meanwhile we had another contractor lined up immediately, but it took the lender 4 months to finalize paperwork before they would let the new contractor touch the property so we got eaten alive in holding costs. Once we got the new contractor in, he informed us of all the many, many issues that weren’t found by the first contractor. ($50K worth of issues) Our contingency was only 15% of the estimated renovation portion of the loan, which didn’t cover the $50K so we ended up coming out of pocket almost $40K just to get everything done because the lender refused to pay the contractor out of the contingency reserve until the project was totally complete.

All in all, it took us 2 years to renovate something that was supposed to be 6 months, max. I chalk it up to lack of experience, 203K loan, and not that great of a deal.

It turned out alright though. After two years we have all the units rented with all expenses paid and $700/month in cash flow. With a forced appreciation of $350K giving us $70,000 in equity.

The pro was definitely the 3.5% down and low interest rate. Our seller even paid $12,000 concessions at closing and paid our interest rate down.

If it were me, I’ll never do it again. But if it makes sense for your deal and your contractor is okay with being paid on the back end of everything being finished, then it could be something to consider.

Damian Bialonczyk · Answer

@Brandon Reed

I purchased a Fannie Mae Homepath property once with a 203k. I honestly thought the process was relatively painless. One of the negatives was that all of the rehab work needed to be done through a contractor, who needed to provide an estimate prior to loan approval and would get disbursement checks directly from the lender. This didn't give us much negotiating leverage with the contractor. You can also expect to pay at least another point in interest compared to a conventional loan.

Any Experience with a 203(k) Loan?

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