FHA 203K Adventure Experience

[Jacob Lapp]

The idea of an FHA 203k sounds like the best tool to use for a new investor. I've heard about it for years and with the market it's a hard sale especially since most agents don't fully understand the process.

I’ve done 3 multi family househacks prior to this one. All with conventional owner occupied loans we just got the opportunity for our 4th.

All the previous houses needed work but nothing to this extent.

The new property consists of 2 structures one large duplex/ twin house that is 90% gutted. The exterior work has been done. New roof, siding, decks etc and some windows. Both units are 3 floor 3 bed 1 bath units and will rent for between 1900-2100 a month.

The other structure is a 1200 sq ft garage/storage space with a 2bed 1 bath remodeled apartment on the second floor. Currently rented for $1475.

The storage space by itself should rent for about $500-$700 a month.

Expected fully producing gross rents $5775-$6375.

List price for the property was $400k our offer was accepted at $335k.

I had 4 different contractors come out. I did my own numbers for an expected rehab cost. I was at 160k for all the work needed.

Contractor 1 came in at 100k No way

Contractor 2 140k project would take longer because he wanted to do most of it himself

Contractor 3 170k this is who we went with had a great portfolio of similar projects and I know him personally

Contractor 4 200k too high

So now we have 335k purchase plus 170k rehab plus a HUD required 10% reserve so add 17k total value at 522k.

After 3.5% down total loan is for $503,730

I locked my rate in over a month ago and with 2 points was able to buy it down to 4.5%.

I needed 2 separate insurance policies for both structures. One needed a builders premium plan which was more expensive than a normal policy.

My monthly payment PITI was expected to be at $3730.

Me and my wife are planning on living in the 2 bed unit. On the low end of rents with us living there we will be bringing in $4300 a month. So we will be getting paid some to live here.

Side note now that we are renting our old unit with this property our Cashflow will be just under $6k a month for the 10 units we have. This is our comfortable financial independence

number that was our goal when we started 3 years ago!! Not planning on quitting the W2’s yet but the choice is now real and safe! I am 25 and she is 23 years old. You can do it too!!

The next step was having a HUD consultant walk the property with the contractors bid and made sure it checked all the boxes for FHA requirements which we had a few small additions that didn't alter the rehab price.

Now all we needed was the appraisal. There are very few comps and I knew this would be a tough one. The first appraiser accepted the challenge came out the following week and the appraisal was due back the next week.

3 weeks later we got it. It was low but still hit the number we needed. FHA 203k will loan the full amount up to 90% of the ARV. So the loan was for 503k and the ARV couldve been at 450k and we could still get the loan done. The ARV came back at 510k. I was hoping for 625k to get the 20% in equity to refinance to a conventional loan (based on our area the 1% rule is a great deal so if gross income was at 6375 and I listed it for $637k it would sell) but at this point waiting so long I was glad that it covered the loan.

What I was not expecting and didn't know about was FHA's self sufficiency test for loans on 3-4 unit multifamily. Meaning appraisers fair market rent opinion for all units multiplied by .75 can not be more than the PITI for the property. I think it's a good rule! If the market rents were correct…

The appraiser valued the 2/1 unit at $1475 because that’s what it rents for.

And the 3/1s at 1400…

And nothing for the storage unit…

Meaning the most my PITI could be is 3206..

This appraisal came in on Wednesday and settlement was supposed to be tomorrow (Friday). So now we had a dilemma.

I knew that I could get a signed lease for at least $1850 ahead of schedule for one of the 3/1 units (because one of my tenants expressed extreme interest in renting this place when we were done) and thought if I could provide that the underwriter might consider that as fair market rent for both units. They shot that down.

So I gathered a list of comps from the MLS and from rentometer and a list of everything available in the area on apartments.com, Zillow and Facebook marketplace. Sent that to my lender who just submitted to the AMC hopefully the appraiser will reconsider🤞

The other option is putting more down. Which fortunately we are able to do but wasn’t the initial plan.

Either way we are settling next week on what I think is a pretty good deal and hopefully my experience with this helps someone else thinking about it!