Preparing for a 203k loan

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Preparing for a 203k loan

Aziz Bangurah
Lexington, NC · Member since 2017 · 9 posts · 3 votes

After doing some research I've decided to go for a 203k loan to buy my first property. I'm not ready to apply yet, I'm still improving credit score and saving up for down payment. 

The max amount of loan I want to use is 100,000 renovations and purchasing, I choose this amount because I can afford the mortgage, if no one is living in the units. I found a 4 plex 2 bed rooms, 1 bath for 99,000 but Zillow estimated it at 75,000. I notice the owner spent 97,000 in 2011. It looks like it drop in value due to the owner not taking care of it. The 4plex has 3 rooms rented out, the extra is used for storage right now. The tenants are paying 365 a month for rent, that is below average for the area and they pay utilities and a HOA of 81 a month for all 4 units. Mortgage cal estimated 775 a month including taxes, insurance, PMI, HOA.

My plan is to purchase the property or a different property at 65k or 70k use the rest of the money for rehab and live in one of the units.

My questions

1. Does 203k loans work with property that have tenants living in them or will I have to buy a foreclosed  property 

2. How much money should I save for this project ? My biggest fear is not having enough money out of pocket to cover downpayment, closing cost and etc.  My goal is 5,000. Will I need more ?

3. Can I do renovations while tenants live there ?

4.I've notice there are a bunch of 4 plex in the neighbor own by different owners they all look similar . If I fix mine up and raise the rent could that potentially  be a problem ?

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Bob Okenwa
Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
9y

First and foremost, the Zestimate is wildly inaccurate and is not to be trusted as an appraisal tool. Even Zillow itself says it's only about 90% accurate at best, and that 10% can be quite the difference in some markets.

As for the 203k loan, you can use it to purchase a owner-occupied property with up to 4 units regardless of it being foreclosed or not. Down payment is 3.5% and closing costs can range from 1-5%. You can request that the seller pay your closing costs and see if your area has a down payment assistance program that you can use to keep some of your own cash in pocket. 

Doing renovations while people are in the units isn't something you'd really want to deal with so this plan may have its limitations. It may be hard to schedule contractors for a time that fits the tenants schedules and the tenants may not be very receptive to having contractors tear up their living space for days or weeks on end.

If you are fixing the property to bring it up to market standards, then you should expect market rent. If the tenants do not like it, they will probably move out, but if you put a quality product on the market at a quality price in line with the competition, then new tenants will eventually move in to replace the old ones. Just be aware that you can't raise the rent for people who are already in a lease.

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  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    First and foremost, the Zestimate is wildly inaccurate and is not to be trusted as an appraisal tool. Even Zillow itself says it's only about 90% accurate at best, and that 10% can be quite the difference in some markets.

    As for the 203k loan, you can use it to purchase a owner-occupied property with up to 4 units regardless of it being foreclosed or not. Down payment is 3.5% and closing costs can range from 1-5%. You can request that the seller pay your closing costs and see if your area has a down payment assistance program that you can use to keep some of your own cash in pocket. 

    Doing renovations while people are in the units isn't something you'd really want to deal with so this plan may have its limitations. It may be hard to schedule contractors for a time that fits the tenants schedules and the tenants may not be very receptive to having contractors tear up their living space for days or weeks on end.

    If you are fixing the property to bring it up to market standards, then you should expect market rent. If the tenants do not like it, they will probably move out, but if you put a quality product on the market at a quality price in line with the competition, then new tenants will eventually move in to replace the old ones. Just be aware that you can't raise the rent for people who are already in a lease.

    1Reply
  • Aziz Bangurah
    OP
    Lexington, NC · Member since 2017 · 9 posts · 3 votes
    9y

    Thank you @Bob Okenwa for the fast reply and great answer. 

    I have some follow up questions. 

    How would I appraise the property to know how much to offer ?

    When you say closing cost can range from1-5 % is that of downpayment or loan amount ?

    Could I renovate the storage room first and maybe ask a tenant to move into the newly renovate room while I fix the current room they are staying in ?

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  • Bob Okenwa
    Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    Closing costs percentage would be based off loan amount. If there are no other MFR's in the area, I believe the property would appraise based on the income approach and how much revenue the property generates. If you do the extra space first and lived in it during that time, you could then see if one of the tenants wants to move to the upgraded unit and you can then move into that one and renovate it.

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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    Howdy @Aziz Bangurah

    Two more things you need to be aware of using the 203K loan.  The work must be done by licensed contractors.  And the project must be completed within 6 months.

    So having tenants in units you want to Rehab can be an issue.  Find out when leases expire.  Covert to month to month lease if need be.  You will need to have a good plan in place to organize the moves and Reno schedules.

    In order to determine the most accurate ARV for the property you will need to use recently sold comps. You say there are other 4-plexes in the area. Then contact an investor friendly Realtor to help you out.

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  • Aziz Bangurah
    OP
    Lexington, NC · Member since 2017 · 9 posts · 3 votes
    9y
    John Leavelle will it cost to contact and setup a meeting with a real estate investor?
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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    @Aziz Bangurah

    Do you mean a Realtor?  No.  They work on commissions.  But, please don't waste their time either.  Not all Realtors work with investors.  Some deal with residential home buyers and sellers.  Others specialize in Land or commercial properties.  Some do a little of multiple types of properties.  You may have to shop around for one that understands investors.  Preferably you should find one who is also an investor.

    There are plenty here on BP.  You can ask for one near you.  I believe there is a Forum for Realtor questions here.

    Also I strongly recommend you find a local REI club or Meet-up group to help you. You can locate one here on BP. There are Investors, Lenders, Realtors, Contractors, and others who attend these meetings.

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