Seeking FHA 203K advice and market insight for Dallas, TX / DFW

[Hunter Peterson]

Hello BP.

I am currently renting a home in Plano, TX. My lease ends in March '19, and I'd like to determine the viability of the following "live-in flip" plan from experienced investors and lenders in DFW:

1. Acquire outdated, fixer upper property North of Dallas as my primary residence using FHA 203K loan.

a. New to DFW & no RE team yet, so no complete tear down properties.

b. Look to find best deal during 2018 holidays (ideally close on a home before 2019).

2. Renovate from Jan-March '19. Must move in by April 1. 

3. Depending on the housing market, duplicate process and turn this property into rental or just sell in 2020. 

I have the capital to put a 20% down payment on a nice home, but I'd rather leave as much money available as possible to see where the RE market goes and invest those dollars in other REI opportunities as I build my network and set strong, well-informed target parameters for investment properties.

Thank you in advance to anyone who can provide their insight on the "North of Dallas" market and the feasibility of this plan! 

-Hunter

[Andrew Postell]

@Hunter Peterson thanks for posting this subject.  

As far as the FHA 203(k) loan is concerned it's a decent loan but the conventional renovation loan will beat it out by a mile. The benefit to the 203(k) loan is that it can work with a lower credit score and it has a lower down payment (3.5%). But the closing costs are higher and the renovation process is very strict.

The conventional renovation loan does require a slightly higher score and a slightly higher down payment (5% on single family) but it is a lot more lenient on the types of renovations you can do. You can even put in a pool if you like...the FHA loan does not allow anything like that at all.

If you are seeking a multi-family property to renovate they both allow it as long as you occupy the property but the FHA will still only require 3.5% while conventional will be 15% down. It sounded like you would have enough to cover either loan type and that's why I wanted to bring up the conventional option.

Keep in mind under both options you will need to be a mini-project manager.  Moving can be stressful.  So can work.  And renovating.  Not trying to scare you off just want you to know what to expect. 

Tag me if you have any specific questions but here's some quick bullet points on the program:

Other Important Items to Know about “Conventional” Renovation Loans

Maximum – Minimum Purchase/Upgrade Amounts:

Minimum: $5,000 (below this on an exception basis only)

Maximum: Limited to 50% of the “after improved” value

Occupancy: Primary, Second Homes, Investment Properties

Renovation Term:

• The renovation term for this program is a maximum of 180 days.
• The Borrower(s) is responsible for the work being completed within the escrow period. If the work is not 100% complete by the end of the Escrow period, loan may implement a .50% (on total loan balance) extension fee that will cover an additional construction term of 60 days. Borrowers will be provided an upfront disclosure detailing this information.

Contractor(s) Acceptance:

• Loan does not “approve” contractors or refer contractors. A borrower must choose his or her own contractors to perform the needed renovation.
• All Contractors participating in the Renovation Program must complete a Contractor Profile Report. All Contractors are subject to the lender’s determination that the contractors are qualified and experienced, have all appropriate credentials required by the state, are financially able to perform the duties necessary to complete the renovation work in a timely manner, and agree to indemnify the borrower for all property losses or damages caused by its employees or subcontractors.

Multiple Specialized Contractors:

• Since this is a limited repair/renovation program, no General Contractor is required. However, A General Contractor will be required on all renovation projects over $25,000. Borrowers are not allowed to complete any of the work themselves as sweat equity.

Loan to Value Calculations:

The original principal amount of the mortgage may not exceed Fannie Mae’s maximum allowable mortgage amount for a conventional first mortgage.

• Purchase: For a purchase money transaction, the LTV is determined by dividing the loan amount by the lesser of the "as completed" appraised value of the property or the sum of the purchase price of the property and the total rehabilitation costs.
• Refinance Transactions: For a refinance transaction, the LTV is determined by dividing the original loan amount by the "as completed" appraised value of the property.

Eligible Renovation:

• There are no required improvements or restrictions on the types of repairs allowed. However, repairs or improvements must be permanently affixed and add value to the real property.

Costs and Escrow Accounts

• The costs of the renovations will be based on the plans and specifications for the work and on the Construction contract for all of the work requested by the borrower. The renovation costs may include a contingency reserve and renovation-related costs.

Contingency Reserves:

• Contingency reserves 10 % required for any unforeseen cost overruns that may occur during construction.
• Unused contingency reserves that were financed into the loan will be applied to the principal balance of the loan. If the contingency reserves were paid in cash, they may be refunded to the borrower.
• The contingency reserve may be considered as part of the total renovation costs or the borrower may fund it separately. The contingency reserve may be released only if required, necessary, and unforeseen repairs or deficiencies are discovered during the renovation. Unused contingency funds, unless they were received directly from the borrower, must be used to reduce the outstanding balance of the renovation mortgage after all of the renovation work has been completed and the certification of completion has been obtained.
• The loan is not re-amortized.

Draw Schedule:

• The program has a maximum 4 draw process.
• The initial draw can be up to 25% of the total project and can be for materials for the project.
• The final draw will be at least 10% of the total project as retainage and funds will be released upon receipt and approval of final inspection, Certificate of Completion from Appraiser, signed All Bills Paid Affidavits and Lien Waivers.

Additional Draw Information:

• Signed Draw Request by borrower and contractor
• Signed All Bills Paid Affidavit
• review and approve the draw request and will release funds for disbursement
• A check will be issued in the name of the borrower and contractor and delivered to borrower via USPS
• An inspection of work to date will be performed at 50% complete

Change Orders and Cost Overruns:

• Changes to the initial plan are not permitted unless prior approval. Any work outside the scope of the initial plan is not permitted as the loan amount cannot be increased.
• If the project encounters cost overruns, those cost overruns will be the responsibility of the borrower to pay.

Renovation Term Extension Fee:

• .50% of the total loan balance. This is a post-closing penalty charged by the Escrow Administrator to extend the renovation period beyond the maximum renovation term of 180 days in the event renovation is not completed within agreed upon terms.