All Forum Posts by: Matthew Porcaro

A lot of people leave out the self-sufficiency test on FHA on 3 and 4 units.

Ive found people to be more successful with duplexes and single families with accessory units than tri's and quad's. 

Ideally to pass self sufficiency you need to find something distressed and renovate to a higher value using the 203k rehab version of FHA. That's where my clients have had the most success.

Also, with the new Fannie Mae changes you can go conventional and that doesnt require self sufficiency, but might require more in reserves. 

 Hi Marcy! its crazy to see this post pop up again on my notifications haha. So many amazing things have happened since then. I've done more reno loans, and have helped 100's of clients over the years do them as well. 

To answer your questions: 

1. Typically there are banks that specialize in them, let me know your location and I can recommend some banks. You can also check the 203k endorsement summary. Just google it and look for your area, and then you can see which banks did the most 203k's in your market this year.

But however, its not the bank you're working with but rather the loan officer. If you're getting heart surgery, do you care more about who the heart surgeon is that's doing the surgery, or the hospital they're doing the surgery in? 

So when you call these banks, ask them who heads up their renovation lending department. Ask them how many they've done and what portion of their business is renovation lending. 

They either specialize in it, or they don't. This is not the place to work with someone that does them "once in a while"

2. There is no such thing as a 203k certified contractor. HUD does not certify contractors to do 203k's. All that's required is the contractor is licensed, insured, and can provide references and has relationships with suppliers in place. (they have to fill out a one page resume that gets submitted to the lender)

The 203k consultant can give you a list of contractors that they've successfully worked with in the past if you ask for it, but if they steer you towards any contractor that's a big red flag and should be avoided. Also, a consultant has to give you a scope of work writeup with an unbiased cost estimate. If the consultant asks for a contractor bid or requires a contractor bid to put together their specification of repairs, go to another consultant. 

What I advise for finding a good contractor is just use your professional and personal network and ask people who they recommend in your market. Create a good sized list and make sure they're licensed, insured, and let them know you're using a bank construction loan that works in draws and pays them directly. 

Any contractor that has done commercial work or insurance work will be fine with a 203k. 

It's guaranteed money for the contractor as they complete the work. 

 Hey Heather. I've done several 203k's and homestyle loans personally on my own house hacks and have personally helped 100's of people nationwide do them successfully, specifically geared towards house hacking and building equity. 

To answer your questions: 

1. If you're going 203k/reno, speak to a DEEPLY experienced 203k lender first. The reality is majority of real estate agents don't understand or even know about the 203k loan. Lenders as well. But there are a lot of great lenders out there that specialize in renovation lending. That's who you want to work with. A good lender might have agents that they can recommend that understand the process, as well as 203k consultants they have good relationships with because they've successfully done deals with them. Think of the lender as the quarterback on the 203k. 

That said, don't let a lease dictate your homebuying process. The lease is the last of your worries. The #1 most important thing is finding a deal that works for you. If you have to drop the lease, you do it when you need to. I'd start talking to lenders now just to see where you're at. 

2. This was actually just extended to 12 months, and I believe 9 months on a limited. Also, this is not a hard and fast rule, if you go over 12 months there's no penalty so long as you have a reason why it's going longer. Construction tends to drag. The reason they make duration guidelines is because without them people would drag it out for an eternity. 

That said, I personally like to aim for properties that I can take vacant. 203k shines brightest when you take something that is basically uninhabitable and use the banks money to create a ton of equity. That said, on a limited 203k you would likely not be buying something that needs that much work. 

But yeah, Ideally you'd want to take vacant, or ensure that they're month to month and you can legally ask them to vacate. I'd go as far as to help them move, pay for moving costs, etc. to make that tough event a little easier on them. 

Again, that said, if it takes longer to get them out than you expect, and you go over that 9 month duration, there's no "penalty" by the bank. You just need to give them reason why i.e., tenant can't move yet"

3. Yes, its completely up to you and your budget. Now, on a limited you're only limited to cosmetic and you can't change anything structural, move walls, layout, etc. You will be required to do at least the minimum by FHA standards. Peeling paint, handrails, working windows and doors, etc. Those would need to be included on the scope of work and not be done by you.

If you want to repaint rooms or do some light work that isn't integral to the property or FHA guidelines, you can do it yourself after the work is completed.

If you have any other questions, let me know! Happy to help. 

 I've done them multiple times myself (including the Fannie Mae HomeStyle) and I attribute pretty much all of my success in building equity and cash flow quickly in an insanely competitive market to the power of 203k's and renovation loans in general. 

The reason they get such a bad rep are: 

1. Agents and lenders are the only ones that would tell their clients about them, and their truly is no real benefit to the lender or agent to do/promote a 203k. Understandably, its added work for them. However, its tremendously beneficial to the buyer to get access to all the funds to purchase and completely renovate a property for only 3.5% of the total. 

2. Since very few agents or lenders do them, they do them sporadically, never truly learning how they work. They also only see one small portion of the journey. Lender: Contract to close. Realtor: Deal Search to closing. 

They don't see what happens before and after that process... IE working with the inspectors, HUD consultants, contractors, etc.

3. Residential construction is the Wild Wild West of the construction industry. "Contractors" working out of the back of their truck, writing estimates on napkins, taking 50% up front deposits. There's low barrier of entry in most parts of the country. 

So people end up working with bad contractors that have little to no professional work experience, and this has become status quo. 

The 203k and HomeStyle are built and handled the way construction is supposed to be run: Licenses, insurances, references provided, A clear line itemized scope of work, clear timeline, paid out in draws, with holdbacks until the end. 

The "extra paperwork" everyone complains about on these loans is paperwork that should be on every single construction project. License, insurance, resume w/ references, clear scope of work.

If every residential construction project started out with vetted, licensed & insured contractors with a clear, detailed scope of work, and clear timeline with milestone dates, there would be way less horror stories. But people can't fight the urge to go for the cheapest price from the no-name contractor. 

I've been working in construction for 20 years, 15 of those in NYC working large scale design and build construction on projects ranging from $1M to $500M+. 

Every single project I have ever worked on is structured the way that renovation loans like the 203k and HomeStyle are built. 

I've successfully helped hundreds of people do 203k's and homestyle loans all across the US over the last 6 years. 

Like anything else, once you understand and respect the process, its like anything else. 

There's renovation specialist lenders all across the country that do these day in/day out with little to no issues. You just need to know what you're doing. 

 Unfortunately like I said, theres no shortcut for this. You have to learn by experience/by doing. You can use the numbers I gave you as a really rough guideline. 

There are some softwares that do it, but the amount of time its going to take you to try to measure eveything and get it exact, you could be making more waves by placing a lot more offers and getting into the actual property with a contractor or inspector to find out true pricing. 

In my experience, Ive also seen that ChatGPT is pretty good at analyzing renovation costs in markets if you give it pictures of the property, square footage, and location. But do NOT lean on this lol

Definitely a loaded question as said above. 

What I'll say is renovation cost is renovation cost. Doing it yourself or GC'ing it yourself isn't a subtraction of cost or a savings. No matter how you cut it, estimated renovation costs are going off of labor, materials, and some magnitude of profit. 

Take these numbers with a grain of salt, but I help people with renovation loans across the united states and these are the rough order of magnitude numbers I use. 

Full gut + additions/alterations/dormers = $150-200/sqft

Heavy Renovation $100-$150/sqft

Moderate Reno $60-100/sqft

Light $40-60/sqft

Minimal $20-40/sqft

The only way to know is to get contractor bids in your market and take an aggregate across the board. 

Also go to local REIA meetups or real estate meetups and ask investors and agents what they're projecting in their market.

That's the only way to know for sure, and even then its just an estimate or guess. 

Wish I could be there for this one :) 

 Hi Mike - so the 203k will fall within those loan limits. For instance, if you bought a property for $2,000,000, you'd have $326,875 left for renovations. 

Essentially, both the purchase price + the renovation costs & contingency have to fall within the umbrella of the loan limit, or whatever you're approved for, whichever is lower. 

As some other people mentioned, self-sufficiency test will be what you're up against on a quadplex. 

Now, I've had many clients that buy fixer upper quadplexes using the 203k or used the 203k to add bedrooms/bathrooms to each unit to boost the potential rental income, and in those instances they were able to get the proeprty to become self sufficient. 

Buying distressed multifamily is the only way to make house hacking and FHA work in my opinion since you are giving yourself the best chance getting in at a lower cost basis, building value on the purchase and upgrade, rather than looking for a unicorn of a move in ready quadplex that meets self sufficiency.

I've done several 203k's personally in Long Island and NYC for myself and for clients of mine. 

The #1 most important thing to focus on is making sure that you have a lender that is an expert at these. Most concerns about 203k's arise from people that have bad experiences with them because they worked with a Loan Officer and team that is not deeply experienced in these. 

Another huge mistake people make is only having one contractor bid the job, and having the contractor create the scope of work. 

The process looks like this. 
Find a property that needs work via MLS or Off-Market as you've mentioned, place offer based on comps in the area, and what you think the property will be valued after renovating to come up with your offer, once the offer is accepted, have the 203k Consultant go to the property before anything else. They will put together what is called a Specification of Repairs or SOR report. This is basically a scope of work based off of their inspection of the property of what needs to be done. It will also include what you'd like to be done.

Once you have that, only then do you bring in contractors to estimate the project. Contractors are much more receptive when you have the scope of work already lined out. Just have them write their numbers on that scope of work, and make it easy for them.

Once that's done, you pick the best contractor for the job and not just the cheapest one. Having multiple bids will help you compare what true pricing is. 

Once you have that, you have a solid number you can close with. 

Your worries about banks taking too long to pay contractors isn't reality when you work with a bank that knows what theyre doing. I just finished a renovation loan on my forever house, and the time from the draw request from the bank to the check being delivered was about 2 business days. 

Your biggest challenge in NYC is finding a good deal where the numbers work. Going off-market is a great strategy, and how I found my house on Long Island. We went into the neighborhood we wanted and took down the address of every house that we liked that looked a bit dated and needed work. Then we sent handwritten notes with pictures of me and my family stating that we're eager to move into the area and wanted to see if they had any interest in selling to us privately. 

I highlighted the fact that using a renovation loan like a 203k, you can purchase the property in as-is condition so they dont have to do any repairs or clean the house or be worried about having other people come in and get it inspected and try to beat them down on price. 

We found our forever home at about 150k under-value going off market. 

In NY - i think its your best bet, it just takes some time and persistence to see results. 

Long Island is slow to the ADU game, but the federal programs like FHA and Fannie Mae are pushing them.

What I'm helping a few clients with on LI right now with is getting houses that are already setup with accessory unit "ready" floorplans. 

Which is a lot of LI. Its your split level homes, basement apartments with egress, existing detached structures with liveable units 

On LI they call them "non-conforming units" but they're being underwritten now as income producing even by FHA and Fannie Mae/Freddie Mac. 

It's definitely a gray area, but the reality is that its "common & customary" to rent out non-conforming (not legally zoned) income producing units in Long Island houses. 

Brookhaven and Huntington have beginning to allow them. You will need to submit plans & permits and appear in front of the zoning boards to get them. 

Basically what I'm saying is, focus on properties that already have it. Not a new build one. 

You can always use a 203k or HomeStyle to fit out the property to become a conforming unit. I wouldn't depend on those grants that have wayyyy to much red tape as mentioned above.