Fannie Mae Homestyle Loan update and lessons learned.

[Brendan Chisholm]

I recently wrote about my experience with closing a Fannie Mae Homestyle loan and going through the vetting process for general contractors. Fast forward sixty days, and I wanted to provide some insight into renovation itself.

My wife and I closed on a home at the end of June. Considering the circumstances, the closing process went seamless. To be honest, it was actually quite eventful. My wife and I sat at the end of a long table with our attorney at the other end. We also had 10 month old son with us as well. To say the least, my son provided all of us quite a few laughs. After closing, we found our way to the home to start the before and after pictures.

The dumpsters were dropped off the same day. Sledgehammers began to swing and demolish walls. I won’t bore you with all the details of the interior renovations. I will say that we are now sixty days into rehab, and the interior work is maxed out as we wait for permits. Until we receive the approval, we are not able to start sheeting rocking, and all the other next steps. At the time of this writing, we have lost close to twenty total days. As we patiently await these approvals, I will impart some lessons learned for the group.

Let’s first give everyone the obvious lesson, very few things go according to plan. Always have a contingency plan in place. This rehab will be my family’s eventual home, but if this was a fix n flip you need to align expectations on the timeline. Our initial expectation was to be in the home by October. However we got our hopes up that we would be in by Labor Day. We reverted back to this expectation of October once rehab slowed. My family and I are fortunate to reserve funds for paying two mortgages. If you are flipping a home, be conservative on your timeline to finish. Create multiple scenarios to understand the costs for the hold period.

Second lesson learned, there will be rehab issues, minor or major, after you start the interior tear down. We have been fortunate to only encounter minor issues. It was a small plumbing issue and a need to replace lead pipes. This made a small adjustment to our plumbing costs.

Further to the point above, and a third lesson, costs budget are estimates. Until the work actually begins to happen and is complete, it is a business plan that will guide and level set expectations for what the costs may be for the project. Certain line items will go below estimate, while others will be above. In the end, you hope you can stay below or on budget. Fannie Mae Homestyle Loans require a 10% contingency reserve, it is best that you do the same for flips.

Last point, and I highly recommend you check with your local municipality and state on this one. About thirty days after submitting our building plans, I found out that there are regulations pertaining to improvements to homes located in a flood zone. I was aware that our property lied in a flood zone. We have insurance covering it. What I did not realize is that in Connecticut (and again, check with your local municipality and state) is the following Zoning rule:

Although your property lies, in part, within a known flood hazard area, your submittals indicate that the improvements, shall be generally confined to the building footprint, and are not “substantial” per the “Flood Regulations” – meaning that the cumulative cost of the work will remain less than 50% of the fair market value of the structure.

In view of the above, no special flood hazard, coastal, or inland wetland permits are required at this time. Please note that the “substantial improvement” provisions of the “Flood Regulations” are cumulative over a period of five (5) years from the time of the first repair/improvement. In this instance, any improvement conducted before (five years from issuance) that push the cumulative costs of the fifty percent (50%) threshold will require you to structurally floodproof the entire building to the strict stands outlined in the regulations.

Knowing this regulation now, explains why one step of the permit approval was delayed. Luckily, the renovations fell short of the 50% threshold and were approved by the Environmental Protection Board. If you are planning renovation / improvements in a flood hazard area, please keep this in mind.

For now, we will keep our heads up until we receive the permits and approval. We are gaining valuable lessons for the potential next fix n flip opportunity. This specific experience reminds us to temper our expectations. I hope my experience so far helps anyone that runs into similar situations. I’ll share some insight after the project is complete.