Investors Who Used 203k — How Did It Go?

[Minho Lee]

For those who have used an FHA 203k loan for a house hack, how did your experience go?

I've recently been learning more about the 203k loan and have talked to a few people who are considering going this route. It seems like a great way to get into a value-add deal, but I've also heard it can come with more complexity compared to a standard FHA loan.

Curious to hear from experienced investors who have actually done it:

• Was it worth it in the end?
• How was the process with contractors and timelines?
• Any surprises or things you wish you knew beforehand?

Would really appreciate any insights or lessons learned from your experience.

[Matthew Porcaro]

Quote from @Minho Lee:

Quote from @Matthew Porcaro:

Hi @Minho Lee - so admittedly, I'm biased. Not sure if you saw me on the BP Podcast, but I went deep on why I think the 203k is the best way to house hack. You can lookup Episode #1281 on BP's youtube channel! 

To answer your questions: 

1. The FHA 203k is naturally more complex than the FHA. The 203k version gives you all the money to buy the house, but also all the money to renovate it, and ability to wrap in up to the first 12 months payments while renovating, closing costs, etc. All in exchange for just 3.5% of the total purchase price + renovation budget.

The added complexity is there is bringing in a contractor and defining a renovation work writeup and budget BEFORE closing. 

However, when you have your ducks in a row, its by far the most powerful home buying product on the planet due to how much you get, with how little you need to put in. 

Remember, as an investor you're looking for a few things on every deal. Equity, cash flow, appreciation, and tax benefits. 

With a traditional FHA, you're going into a move-in ready, mostly mint house (FHA inspection is hard to pass) with only 3.5% down. You can house hack it, but expect little equity. 

I personally think this is where house hacking tends to fall short and sometimes gets new investors in trouble. 

They buy a triplex or quadplex with very little equity, have the other units covering majority of the mortgage, and if anything goes wrong, the tenant breaks something, or something else breaks, you have no equity or cash flow to handle it. 

The 203k allows you to find something and build the equity into it, make everything new on your own accord, and ride that wave with more meat on the bone from the start. 

2. Was it worth it in the end? I've personally built over $1.5M in equity in the last 8 years using renovation loans like the 203k and HomeStyle on my own primary residences I've bought. I started my first one with just 10k as my down payment on my first two family.

It was more than worth it, and I wouldnt be the investor I am today without it. 

3. The process with contractors and timelines is just as it will be with any contractor or timeline. The 203k Process is build how every project should be run. I grew up in the construction industry. I worked as a design-build electrical project engineer in NYC for 12 years before going full time into real estate. Every major project I've done follows the same process as the 203k. 

You get a scope of work done BEFORE bidding it out to contractors. The scope of work is written by the 203k HUD consultant. They give that to you, and you give that to contractors. Then you have 3-5 contractors bid that scope of work, and compare the estimates apples to apples. Once you have a clear scope of work, you create a timeline and schedule, so the contractor knows when they're getting paid and at what milestones. The 203k Consutlant inspects to make sure the work has been completed as the project progresses, so the contractor can get paid as they complete the project.

4. The biggest surprises or things to know ahead of time: 

Timeframes are everything. You cant start looking for contractors and designing the renovation. You need to be clear on what you want to do to the property, and nail that down before you do anything else. Once you get under contract, get that 203k conusltant out there immediately to create the scope of work. Finalize the scope of work with the consultant BEFORE going with the contractor. Your lender can order appraisal (that takes long) with the scope of work given by the consultant. You can always tweak later, but appraisal usually takes the longest on these. The appraisal is based off the scope of work you're doing to the house, not the house's present value. 

Last but not least, basically every mortgage bank/broker offers 203k's. But just because they can do it, doesn't mean they should. 

Work with a lender that SPECIALIZES in them. Not "oh Ive done them before" or "I did one last year" 

There are teams that specialize in renovation financing and do tons of them each month. Thats who you want to do it with. You cant leave these to chance. 

A lot to unpack, obviously renovation loans are deep, but they put house hacking on easy mode. 

The goal with house hacking is to build a portfolio. Making sure you build equity and do value add's with no renovation money out of pocket on each deal is exactly how you do that quickly with little capital starting out. 

What a great story, Matt. I appreciate you sharing your story and agree that the goal is to build a portfolio. Out of curiosity, did you start in Long Island? How did you go about finding a deal for your 203K process?  

Yep, thats where I started. My first property was an REO two family on Long Island. It was bank owned, completely dilapidated. But the great thing about the 203k is no matter what the condition, I could buy the property and get all the money from the bank to fix it. 

The way I found it was just relentlessly placing offers. I was placing 3-5 offers a week for a few months and eventually this one hit. 

Most people new to the game don't realize that your offer is your most powerful deal finding tool. 

Most people just look on Zillow and MLS, looking for an asking price that will pencil out as a deal. 

Remember this: Deals aren't found, deals are made. The seller is obviously not pricing the property in to benefit the buyer. They're pricing it to benefit themselves. 

That said, certain motivations will cause them to take a lower offer. The more offers you have out there, the more potential you have to find sellers willing to negotiate. 

Looking for properties without placing offers is like fishing without bait on your hook. The bait is the offer. You're not offering on move-in ready homes. You're offering on properties that are distressed and wouldn't pass a normal inspection. That's where your angle is. 

Offer on everything and anything at a price that works for YOU. 

Remember this, your goal with placing offers is not to get it accepted. 

It's to fish out motivation, and get a counter offer. Once you have a bite, that's when you dive deeper into estimating renovation costs etc.