203K in Cleveland,OH – Rude Awakening

Hello,

I’m a first time investor from Cleveland Ohio. This year I purchased my first investment property taking advantage of the low down money down FHA loan for owner occupants with the intention of “house hacking.” I have a few things to do in the tenants unit before I can rent it out but should have it tenant ready in the next 30-60 days. I did not use a 203K loan.

During my house hunt I was adamant about finding a house where I could take advantage of the 203K loan and have any repairs, including some nice to haves, included in the mortgage loan. My experience with the 203K process wasn’t pleasant and since I had the firsthand experience I thought I’d share.

The house I chose was an all brick 90 year old 2 family home with 3 bedrooms 1 bath in each unit. The house had a front porch for both units, a concrete driveway with 3 parking spots in the back, no garage. The homes attic and basement were massive. The house included lots of old world charm: laundry shoots, hard wood floors, built-in cabinets, fire places, and lots of original woodwork. In Cleveland you’ll find TONS of houses like this. The home is located in a C+ neighborhood, in my opinion.

The home was being sold by HUD for $37,500; I was the highest bidder in their online auction.

With my not so experienced eye I noted that the house needed bath, kitchen, furnace, plumbing and electrical updates as well as floor refinishing.

The inspector who completed the inspection was a certified FHA inspector and completed a combination general inspection and 203K inspection simultaneously. The first thing he asked me was what I would like repaired with my 203K loan. This was my list:

• Updated electrical, plumbing, and furnaces (with central air)
• Refinished floors
• A garage or additional concrete parking pad (so that each unit could park 2 cars)
• Kitchen and Bath updates

203K Info as it was explained to me:

• My total loan amount could not exceed the ARV (after repair value) of the home. Based on comps this home would not be worth more than $85,000-$95,000 after repairs.
• The inspector would be the one to determine what repairs would be mandatory repairs per FHA’s guidelines (repairs that I would be required to use my 203K money on BEFORE any of my wish list items could be completed.
• He would also recommend repairs that I could have done or decline to have done at my own risk.
• The contractor who completes the work has to be vetted to work on a 203K project
• oThe bank recommends a few contractors for you to choose or
• oYou can choose your own contractor but they would have to go through some training to become 203K “approved”
• oThe contractor does not get paid until the project is completed
• oIf you went with a contractor the bank recommended, the estimated repair costs the inspector determined in the feasibility report would more than likely be the amount the contractor would charge – according to the banks 203K Loan specialist.

The inspector went through the entire home and pointed out concerns that he had and making suggestions on updating the house. He mentioned the home would be so much nicer if we opened the kitchen to the dining room, to give it that open floor plan that’s so popular. I loved the idea and asked him to go ahead and include an estimate for that in the report for me. He noted that the roof and majority of windows needed replaced.

I uploaded the itemized 203K Feasibility Report to the BP File place. This is the actual breakdown of the repairs and the estimated costs. 

The estimated cost for the mandatory FHA repairs alone came up to $47,096.62.

This brought my total loan amount to $84,596.62. This did not include any of my desired wants. The recommended repairs totaled an additional $21,700. My desired repairs came to $78,251.00. The total amount plus a 20% contingency fund came to a whopping $176,457.14.

Considering the max value of this home was approx. $95,000 and the basic repairs that it needed, I declined to pursue the purchase of this home. This was a wakeup call. Home repairs add up fast and in a city where a majority of the homes are older and will likely need sprucing in tons of areas, the 203K loan didn’t appear to be such a great idea anymore. While I 100% agreed that the heating, electrical, and plumbing should be mandatory repairs; ceramic tile, floors, gutters, decorating, and minor masonry work, in my opinion did not seem like mandatory safety repairs to me and therefore should have been in the recommended column, not the mandatory column. I did have the option to dispute the inspection report if I wanted to, but I chose to move on instead. I think that the 203K loan is an awesome product but maybe for homes built within the last 50 years or less.

I just wanted to share my experience and shed some light on how the process went for me. I’m extremely happy with “This old house” that I did end up purchasing and am excited to rent it out and move on to my next investment property. 

Hope someone finds this helpful!

Suinda Machuca