Non refundable earnest money with 203k financing - YAY or NAY?

[Meera Lakhavani]

Hi BP Friends!

I am trying to go under contract for my first house hacking deal in Chicago using FHA 203k financing. The market is brutal, 15+ MLS offers rejected so far. All the investor friendly multi-unit properties in decent, safe neighborhoods get multiple offers above asking, including cash. Not to mention, many of the best deals on the MLS hardly even cash flow.

I decided to be creative and look at wholesale opportunities then try to convince them to accept my FHA financing. Shockingly someone is open to it but they want $5,000 non refundable earnest money if my financing falls through. This sounds terrible at first glance because of how often FHA deals fall through BUT the property will cashflow $1000+ per month after rehab. What would you do with an upside this big?

Some more details about the property:

• Duplex with illegal basement unit - I can expand each unit into basement and attic to raise rents significantly
• Price: $310k, ARV 580k. Rehab budget: 180k (possibly 153k because of 15% contingency needed for 203k rehab)
• Will rent for up to $5600 per month after rehab. Likely $5300 though.
• Logan square neighborhood: safe, walk able, desirable, close to public transportation, close to restaurants, gyms, etc. It is where I ideally would like to live.
• Needs a LOT of work: full gut. Demo has already been done but house is full of demo related trash. Basement is rat infested. There are holes in some of the floors from rats. Exterior is falling a apart with fake brick turf like veneer and wood underneath. Currently the roof is pointed but would need to be built up and squared off for the expansion into attic. There must be water damage because some windows are missing.
• The lot is small and there is no possibility for garage. It is also very loud due to being right behind the train.

However, there are multiple new construction million dollar homes on the same block. So i know the neighborhood is solid but perhaps this place is a teardown and I am biting off more than I can chew trying to gut it for only $150 - 180k.

I have attached pictures! Any insight you have on determining whether a house is truly a tear down, or experiences with 203k financing falling through would be much appreciated! Thanks in advance.