Closed on my first Duplex using a 203k loan! Here's my experience

[Matthew Porcaro]

Hey everyone! 

So yesterday was a relieving culmination of 3 months of a lot of headaches, stresses, and monotony getting this 203k loan approved; but I finally did it! 

I hit my goal of finding and buying an investment property (and a Duplex at that) before getting married next year! I always knew that I wanted to use a 203k loan to get into a property, rehab it, and rent out part of it to 'house-hack' and begin my real estate portfolio. Despite hearing how much of a nightmare the 203k is to get approved, I did it anyway. It was even worse than I thought, but I'm glad I took this route seeing as the value I am getting for my money is tremendous. With the deal I made, I only ended up needing to pay $10k out of pocket, and I will be getting a cash flowing duplex property, and an instant $60K in equity according to the appraisal and comparable in the area once rehab is done (assuming all goes well!). 

It's almost serendipitous how I stumbled upon the property. Back in April, I spoke with a family friend who is a mortgage broker about the loan. He told me with my W-2 salary I can definitely get 203k financing, just need to start looking for properties, so I did. I knew I wanted to look into foreclosures/REO's, and the first website I went to was Fannie Mae's Homepath website. My criteria was to find a SF home, with ability to add an accessory apartment that could be rented out. My county (Nassau) is one of the most expensive counties in the country, so I figured I'd have to buy in the county over from me which would have a bit lower taxes. Just for the hell of it, I searched up Nassau County Fannie Mae foreclosures first, and that's when I found a brand new listing, right near my current home, that happened to be a LEGAL two family in a middle class residential neighborhood. Duplex's in my area are extremely rare, so I quickly ran the numbers on it (which worked out!) and put an offer in right away. Fannie Mae foreclosures have a "first look" period, which is essentially a short time period after the property is first listed for first time home buyers to take advantage of the FHA loan programs and get into a foreclosed house before investors have a chance to offer on it. This worked out to my advantage. The seller/bank accepted my offer and the fun began!

The loan application process was long and arduous. The bank claimed they were familiar with 203k loans, but we quickly realized that is not the case. I highly recommend anyone taking advantage of this or any other FHA loan to get references on these banks/brokers that are getting you into this loan, because the paper trail needed is incredibly tedious, and if they don't have their ducks in a row the underwriting process can become a nightmare. Remember, when you're using one of these loans to get into a foreclosure, the bank you're buying the home from doesn't really care about you or your problems. They're impatient, and want to get paid ASAP, or else they will just look for the next buyer. They're not emotionally vested sellers. Be prepared to give a large earnest money deposit up front so they know you're serious enough to be prepared to wait out the long underwriting process. We had to ask for an extension 4 times, even up until the closing day. You need to keep them updated with where the loan is at, otherwise they will walk.

The most tedious part of the 203k loan application, hands down, is the construction documentation. The general contractor and all of the trades involved on the job must be completely vetted out, and efficient with paperwork. Specific scopes of work, licenses, agreements, forms, meetings with HUD consultants, all must be addressed quickly during the process. This was the hardest part for us. If you can find a GC that has done these before, it is way worth it. I grew up in the construction businesses, but we have not done a 203k loan before. Family recommended subs and contractors, although great contractors, were struggling to keep up with the paperwork and verification needed to get approved. But, I made sure to hound everyone down and we got what we needed in time. Note - there are two kinds of 203k loans. There's a 203k streamlined and a 203k. Streamlined the rules are VERY different, and it goes much quicker. Streamlined loans, however, are only on homes that need less than ~$35K in renovation costs. For most people, this is probably the case, but for this home we needed a whole lot more money, so if you think your house doesn't need more than that, you can worry a bit less. 

I'd love to say that this is a done deal, but the fun has only just begun. I have the keys and have begun to organize the trades and let the GC know we are set to start demo next week. It's a very old house (100 years), but the bones are great, and we are doing a full renovation ($75K in rehab). There's a lot of work ahead, but this was a huge accomplishment that I'm glad I experienced. I can't wait for the next deal!

I intend to create a post here on BiggerPockets once the process is almost completely done, to give people intending to go down this route an idea on what they're getting themselves into.

In the meantime, I'd be more than happy to answer any questions you may have about the process. Thanks!

[Eddie Gonnella]

Hey man thanks a ton for responding. A recap post would be awesome, but definitely understand the work that goes into something like that haha. 

So it's actually a really small home, about 1,000 square feet with only one kitchen and one bath, so I don't think the plumbing would be as bad as it sounds. That does make sense about wrapping it all in. I was hoping to approach this more as a "live-in flip" since most of the trouble is just that the place is nasty (smoker, carpets, etc) and needs a really good cleaning, painting all interior walls and flooring, all of which I think I can handle myself. 

I had the place under contract and everything was lining up well until it was getting dewinterized yesterday for the inspection and they discovered the pipes underneath had been removed. We just canceled the contract since I had a conventional loan in there. 

So if I am following, I could get the 203k streamlined loan and have a small scope of work, say plumbing + any other safety issues, then it would appraise and close and I could move forward with fixing the rest of the place up myself? 

It is only $90k and I think other than the plumbing issue I was gonna be able to fix it up fairly well for about 15k over a year of my own work. I have plenty of cash so financing the repairs upfront isn't that big of a concern for me... I just don't have 90k of cash haha! 

I'm also looking into getting a hard money loan.