fixer upper 203k

[Brandon Morgan]

HI all, I am a first time investor looking to buy a Multi family. What are your opinions on the FHA 203k?

My real estate agent recommended it to me since we have been looking at fixer uppers and the regular FHA may not approve the fixer uppers that need a lot of work or are not move in ready. it seems to be a viable option but some say it can be risky.

what are your thoughts/ advice on the matter? I'm open to any suggestions. 

[Wayne Brooks]

Quote from @Jaron Walling:

But... you won't be picking the contractors. The lender gets to pick them from an "approved" consultant list. 

There is no “approved list” that must be picked from.. There are “203k contractor certification” courses but they are not sponsored/approved by fha or lenders…just some private company marketing their courses. There is an application/approval form from the lender that the contractor fills out, which is fairly simple. The contractor must be licensed and insured of course along with showing the proper experience. The lender “approves” the contractor, they don’t “pick” the contractor. The lender can give you recommendations of previously approved contractors that they have worked well with though, which would be helpful.

[Wayne Brooks]

@Brandon Morgan The most important part of a 203k, other than qualifying for the loan at the total price, meeting the self sufficiency rule….is picking the right contractor.  Any decent licensed and insured contractor can be approved rather easily.

[Brandon Morgan]

Quote from @Wayne Brooks:

@Brandon Morgan The most important part of a 203k, other than qualifying for the loan at the total price, meeting the self sufficiency rule….is picking the right contractor.  Any decent licensed and insured contractor can be approved rather easily.

 ahh I see. I will be sure to look into the contractor if and when I get there. 

[Joshua Filkill]

For your first investment it is typically not recommended to do a large scale rehab. The 203k loan limits your rehab budget but still gives enough room to create some forced appreciation and make the space you'll be living in nicer. I found it easier to find something turnkey to get started in investing, but the 203k loan can help create some equity as long as you have a good plan in place. 

You must have a good team around you when doing this, as @Wayne Brooks mentioned, having a good contractor that you trust is very important. 

[Jaron Walling]

But... you won't be picking the contractors. The lender gets to pick them from an "approved" consultant list. 

[Michael Gussin]

@Brandon Morgan a 203K can be a complicated and frustrating experience if you don't have an experienced team - contractor, realtor, lender. Once you have your team in order you want to make sure to be pre approved so you know your budget for acquisition as well as renovation funds. I agree with what @Wayne Brooks mentioned in regards to the self sufficiency, this is incredibly important to be aware of while shopping for an FHA financed property. NOTE** the self sufficiency only applies to 3 and 4 family purchase, so if you stick to a 2 family you can avoid that head ache. This is what many house hackers do on their first purchase.

Hope this was helpful! 

[Blake Novotney]

I could be wrong, but aren't you able to ask the lender to approve a specific contractor given they are licensed, insured, and meet the requirements?

[Wayne Brooks]

Quote from @Jaron Walling:

But... you won't be picking the contractors. The lender gets to pick them from an "approved" consultant list. 

There is no “approved list” that must be picked from.. There are “203k contractor certification” courses but they are not sponsored/approved by fha or lenders…just some private company marketing their courses. There is an application/approval form from the lender that the contractor fills out, which is fairly simple. The contractor must be licensed and insured of course along with showing the proper experience. The lender “approves” the contractor, they don’t “pick” the contractor. The lender can give you recommendations of previously approved contractors that they have worked well with though, which would be helpful.

[Brandon Morgan]

Quote from @Michael Gussin:

@Brandon Morgan a 203K can be a complicated and frustrating experience if you don't have an experienced team - contractor, realtor, lender. Once you have your team in order you want to make sure to be pre approved so you know your budget for acquisition as well as renovation funds. I agree with what @Wayne Brooks mentioned in regards to the self sufficiency, this is incredibly important to be aware of while shopping for an FHA financed property. NOTE** the self sufficiency only applies to 3 and 4 family purchase, so if you stick to a 2 family you can avoid that head ache. This is what many house hackers do on their first purchase.

Hope this was helpful! 

so you're saying an FHA 203k with a 2 family is a viable option for a first time investment? assuming the team i am working with is experienced with it. or should I try to avoid it? the lender I am working with seems to specialize in it, they recommended it for properties that need a lot of work, so did my real estate agent. 

[Michael Gussin]

@Brandon Morgan yes that’s correct many of my clients have done this in their first house hack. As long as you have a contractor who seems to be good at communicating and punctual with documentation, there’s no reason to avoid this. Just be prepared for a little more stress than that of a straight purchase due to more parties involved. But stress happens with success it’s part of the process! 

[Rogelio M.]

Thank you all for your contributions to this forum thread!

With regard to tradeoffs between a "2 family" vs "3 and 4 family" approach with a 203(K) loan, I understand the following .... if I am wrong, kindly reply ....

- "2 family" - self sufficiency test will NOT apply; however, it will likely NOT cash flow.

- "3 and 4 family" - more likely to cash flow; however, self sufficiency test applies, and properties usually do not pas this test.

[Matthew Porcaro]

Quote from @Jaron Walling:

But... you won't be picking the contractors. The lender gets to pick them from an "approved" consultant list. 

 This isn't true. Where did you hear this from? 

[Jaron Walling]

@Matthew Porcaro Approved as in.... contractors willing to work with a 203k lender. None of the contractors we hire are willing to go through that process. They work quick and want paid asap. 

[Matthew Porcaro]

Quote from @Jaron Walling:

@Matthew Porcaro Approved as in.... contractors willing to work with a 203k lender. None of the contractors we hire are willing to go through that process. They work quick and want paid asap. 

Ok well, that was misleading. There's no contractor list. Any contractor that is licensed, insured, and experienced can do a renovation loan. I've worked with countless contractors that have no problem doing this process. It's really not much different than hard money draws. If a contractor has done insurance work, they can do 203k loans.