203k nightmare - The work isn't done and we're over budget

[Tamara Taylor]

Hello everyone,

I was very happy to buy my first REO at the end of 2015. The plan was to rehab the house, live in it for a while, sell in 1 - 2 years, make a profit and buy another investment property.

Mistake #1 - I hired a friend as my contractor for my 203k project. I had to fire him 5 months in because there was no way he would have completed the job by the deadline. I had given him $7500 (about 1/2 of the initial draw the bank gave me) to buy supplies. If he spent $1500 on materials I'd be surprised. Now I've hired a new contractor (203k certified) and with the money I have left, including the contingency, which I doubt the bank will give me, I am about $3000 over budget. 

Mistake #2 - I didn't get all the facts about a 203k loan beforehand. Apparently, all of the items listed on the original scope of work need to be done and nothing can change without some authorization from the bank. My question is, What happens if they aren't all done? Example: On the original scope, the fence in the back yard was to be removed and replaced with a new fence. I can't afford to have the new fence built ($1600). Will the bank withhold all of the money for the project or just the amount the $1600 for the fence?

I hope this make sense to someone and I appreciate any words of wisdom.

Thanks,

Tamara

[Chris Mason]

The cost overrun budget can't handle $3k?

[Charles Morgan]

Buy a Keg of beer and have a fence building party. Seriously though, you should talk to your new contractor and see if he has any cost saving ideas. 

You should ask your bank about the withholding as it should be spelled out in the loan terms

[Aaron McGinnis]

1) You've bought yourself a $3000 tuition payment

2) Don't hire friends

3) Talk the situation through with the person handling your draws. Likely, they won't release the $1600 for the fence. Maybe if it's being re-purposed for something else... but it depends on the underwriting policy.

[Dawn Anastasi]

@Tamara Taylor can you get your first contractor (your "friend") to give you receipts to back up the $7500 in supplies?  If not can you sue him for the difference? At least get a lawyer to draw up a letter to show you're serious.

[Dana Whicker]

This is a great learning experience you are in the middle of. Don't let a deal die over $3k. If you do, you may not be in the right business.

I know it's been said already but don't hire friends.

Keep your head up, get this done, and you'll feel awesome.

[Charlie DiLisio]

I suspect that your friend was not licensed or insured either.   Usually the bank makes them produce his qualifications.  How did you not get receipts for the supplies that he purchased.  I wish you well but I'm not sure the banks policy on 203k draws and non-performance of the scope of work.  In 5 months time he could have built a complete house, was he only doing it part time.  Anyway, I wish you well and it is a good thing that it didn't cost you that much if it is only 3k.  Don't give up!  All the best to you and your project.

[Nicole Pettis]

@Tamara Taylor

My husband & I did the 203k loan.

A few things..

1.) we went over our 6 month deadline because of unforeseen delays(ie weather) & we had to go into our contingency a few grand.

2.) Both of those situations were handled with no problem, because I was in constant communication with the bank. My rep approved all of this

3.) 203k money is federally backed, so your contractor friend has to prove that he used that money for the scope that was approved otherwise he could be in some trouble. Again talk to your bank rep & get this all worked out.

4.) An FHA inspector has to approve all work based on the scope for you to get final payment.

5.) all code work has to be addressed first followed by cosmetic

My best advice is for you to call your 203k rep & get this all worked out.

[Brandon L.]

This thread is a great lesson, hope it works out ok for you. 

[Lydia S.]

You're brave and valuable to others for sharing these mistakes, and it is this sort of forthcoming-ness that demonstrates you're capable of cutting to the chase, so I am sure you'll take some of the great advice above.  I hope you find some resolution!

[Tamara Taylor]

Thank you all for your encouragement. I have no doubt that I'll finish this project and move on to the next project with a little more wisdom. I'm pretty tenacious and resilient. To answer a few questions...

My original contractor was licensed and insured. I hired him because he was a friend from church and he seemed really knowledgeable and eager to work on my house. I naively thought that I could trust him more than a stranger. Before closing on the house, I explained to him in person and in emails the stipulations of the 203k loan but apparently "forgot" all about that. I unfortunately do not have any receipts from him. I've asked him for an invoice listing all of his expenses and have not received it yet. I've kept all of my own receipts which add up to my half of the draw.

Like I said, the new contractor is 203k certified and he's been really helpful. He went through the original scope and came up with a new quote for all the work. Even with the contingency I'll be $3000 over budget. I know that doesn't seem like much in the grand scheme of things but there were a lot of expenses that I have already paid for out of pocket that were not in the original scope. (kitchen cabinets, appliances & tools) This was all planned for and there should have been plenty left over to cover unexpected costs. I hadn't planned for the contractor to abscond with his half of the draw. I'm just happy that I was smart enough to keep half of the original draw or I'd really be up a creek.

I did get an extension from the bank. It's just the budget I'm concerned about. I guess I just need to talk to the bank and see what I can work out.

I'll keep you all posted.

-Tamara

[David Moore]

@Tamara Taylor

First of all, thank for posting this thread.  It is great to see someone show something they are currently in.  Your trouble will help others.  Second, I'm not sure going after your friend with the lawyer is such a good idea.  Friends are pretty valuable, and the fact is, the blame is not just on the friend.  You have to share the blame...you hired the friend, and it is not inconceivable that a contractor could have not performed.  But a face to face with the friend, and account for the money is not a bad idea....when this project is done.  We all make mistakes.

[Tamara Taylor]

@David Moore I don't plan to get lawyers involved. (ain't nobody got time for that) If the bank wants to pursue the issue then that's up to them. Unfortunately, this friendship has not survived. He's the kind of person who blames everyone else for his problems instead of learning from mistakes. I'm ok with that. I have plenty of other friends who are supportive and helpful.

[Will Chamberlin]

If budget is really the main issue, it sounds like the 'easiest' thing is to come up with a side hustle that will generate the $3k for you. Short term pain but don't let the deal fall apart over a small budgeting error. Or maybe a friends and family round of funding, just skip the friends.

[Tamara Taylor]

Hello all, 

Here is the happy ending to my story. Long story short: The project was completed beautifully with the new contractor. The bank needed a "change order" to switch out funds to cover something else. I got the contingency. The guy who inspected the property took a few pictures asked minimal questions and left. My check arrived a few days later via Fed Ex. 

As you can see from the before, during, and after photos, it was an ugly task. Well worth all the headaches. I plan to stay in the house for another year to avoid capital gains taxes when I sell. This will also give me a chance to finish a few little projects and I'll get my real estate license too. I can't wait to do it all over again :)

[Danielle J.]

Thank you so much for sharing your story. We always hear the great stories and people hardly share the hardships. I plan to do my first flip soon and have been for a while letting fear of the unknown get in the way. I love the fact that in spite of the set backs you still would like to pursue real estate . I know that whatever happens i must learn from the mistake and press on. If I do not try then ill forever sing my shoulda, coulda, woulda's . Thanks again for sharing this story.. 

[Tamara Taylor]

@Danielle J. The best part of listening to the BP podcast is learning from others' mistakes or troubles. I am happy to share :) I couldn't have done it without BP. It keeps me motivated. Good luck on your endeavors!

[Lydia S.]

@Tamara Taylor

Way to go!  As someone who was fortunate enough to meet you and see your home during the reno, you ended up with a great result!

Enjoy your finished space!!