Our experience with a 203k loan:
Stephanie came across this property on Zillow just searching. It had been listed on the market for quite some time with several price drops. The price was reduced several times over the year so it was obvious that this would be a project. We went to see it and immediately knew it was going to need a lot of work, maybe just not the extent of it right away.
The property was a triplex on 1.25 acres with two units upstairs, one large unit downstairs. The upstairs units were 2 bedrooms one bath with the downstairs was a turned in basement into a 3 bedroom 1 bath (it wasn’t designed well). The yard was cleared with old fencing and mounds of junk around the property from the tenants. It was obvious that the owners neglected it for years. This home was in such rough shape, it would not have qualified for a general FHA loan.
As new investors, we knew we wouldn’t be able to afford the rehab out of our own pocket so we looked into an FHA 203k loan. After finding a mortgage broker that would do a 203k loan, it’s limited here in Alaska, we found a hired a HUD consultant (required for the 203k loan) to do a minimum property standards inspection. This inspection is a bit different than your common inspection as it is really assessing safety and function of the building. As the HUD consultant is the third party between us in the bank, we spent the time to ask questions and discuss our plans for the renovation. The inspection comes back and these items had to be included to the project to be completed.
We started to work with a specialty contractor as an acquaintance to get some bids. We decided to go look up all materials for ourselves to get the estimate in the works. Home Depot offers the Pro program which gives anywhere from 9%-20% off any order over $1500. This was key as our material estimates didn’t include this discount so we were able to use the money elsewhere. We called a roofer and received a few quotes, and quickly discovered this was going to be a pricey project. The HUD Consultant started reviewing our project and thought initially that we could have a specialty contractor with an electrician and plumber as part of our team.
Over the next 4 months we received specific quotes and had to itemize the invoice specifically in the form that the bank requested. Each contractor had to complete specific forms while the broker worked hard getting signatures and information sent back and forth to the bank. It was several months in, until we really had a closer number of everyone’s estimates along with the contingency the bank rolls in. The bank also came back with requests to roll 3 months of mortgage payments into the loan since the extent of the renovation was not going to allow anyone to reside in the units. Getting prepared to close, the owner complete their septic inspection which reported that the septic was too small for the size of the building. While we just reached a close, final number, the cost of the septic was pushing us over our max budget on this project. We were able to negotiate more than 50% of the replacement cost of the septic with the cost of the home. The septic then put us over a limit of doing somewhat of an owner builder deal with four subcontractors (the specialty contractor, electrician, plumber, and roofer) to five. They then required a general contractor to oversee the project- which was the best decision/requirement that happened. We scratched the specialty contractor and luckily made connections with a great local company.
Six months later, we finally closed! (Apparently this timeframe is normal!) One tenant happened to move out a few days prior to closing without any notice and one remained at the home. The larger unit was vacant since we looked at the property so we got started on one of the units upstairs and the downstairs one. We figured if we kept the one tenant for a month we could collect some funds in rent. She didn’t pay rent, was in the way of the contractors, wouldn’t throw her garbage away and even after we got her out (cash for keys) she kept coming back.
The renovation plan: The initial plan that was submitted to the bank was to completely replace all cabinets, open up (knock out walls) the upstairs kitchens, build a dividing wall (unit 2), new flooring, majority of the windows, trim, plumbing, move sink and washer in dryer in the downstairs unit, rewire electric downstairs, sheet rock ceiling downstairs (was push tile ceiling) and replace all bathroom vanities and bath tubs. The plan for exterior was to do a new roof and new septic.
We ended up being able to save so much from our orders from Home Depot Pro along with cutting other cost saving errors of over budgeting. By some sheer miracle we lucked out with the septic. The guy who inspected it was completely wrong. There was a 3,000 gallon tank however we were having some sort of issues with the leach field. Long story short- my septic guy had to dig it up to find that pipes were put in flowing uphill. What we thought was going to be a $18k replacement ended up being a $6k dollar fix. From these savings all together, we added a complete new bedroom, bathroom downstairs going from a 3 bedroom/1 bath to 4 bedroom/2 bath, finishing the outside with vinyl siding, and fencing. Prior to completion, we had both units signed for one year leases.
During the renovation the neighbors would come by and thank us for updating the neighborhood and fixing this property up. They told us stories of the cops being there all the time, the tenants selling drugs out of it, and stealing the neighbors cars. Not to mention the run down condition of the building with it being a corner lot. One tenant that lived there hadn’t paid rent in 3 and a half years while the other one didn’t even know who the owners were.
We have since moved into the downstairs unit and are finishing exterior landscaping and enjoying the peace that Chugiak has to bring.
Tips for the 203k:
FHA does a smaller 203K that lends up to 35k worth of repairs, we ended up being right around $160,000
The minimum property standards inspection language needs to be included in the bid
Having a GC on your team is easy as you have one main contact for the HUD, Bank, and Owner, only one set of forms need to be submitted
Contingency is on your side- I was worried about the $25k extra as funds were tight, but I am thankful for it. There could’ve been so much more that we may have run into- we were lucky
203K from offer to completion averages 9 month-12 months, we made the offer August, closed in February and moved in end of May however are completing siding in July.
We purchased the majority of materials on our own so we could save money on bulk orders, not have to pay the contractors for their time tracking everything down and to get the airline miles- while this was good, communicate for the contractor to buffer some materials as I missed out on this.
During the process when items were completed we would contact the hud consultant and he would come do an inspection. An inspection must be done once a month, papers would be signed and a draw would be on the way.
During a the release of funds the bank would hold back 10% of all draws until the final inspection was completed
If money is left over you can submit a change order to put it towards other items. (The change order has to be submitted and approved prior to work starts).