All Forum Posts by: Matthew Porcaro

@Michael Potts

They’re a pain if you don’t have a team that’s experienced with them.

#1 most important team member is a loan officer that is well versed in renovation loans like the 203k and homestyle.

They’re basically going to quarterback the process for you.

They know what it takes to get these loans done, and with clear direction it’ll make your life way easier.

Let’s put it this way, if it was super easy to do, I think it wouldn’t be as special as it is.

But I can tell you from experience, no area of real estate investing doesn’t come with its own set of challenges.

Just set yourself up for success by choosing the right members.

Talent hangs out with talent. Find the best of the best for every member of your team, and things will fly.

The biggest issue I see people run into with this is they go for cheap contractors or don’t get multiple bids on contractors to level scope.

They also don’t have a lender that has done enough of these to have the experience to know what to look out for.

Hope this sheds some light for you!

Good luck!

MP

@Khalid Ellis

You don’t have to live there during the renovation.

You actually have the option to wrap up to 6 months mortgage payments into the loans principal, which can help you if you’re paying for housing elsewhere, or you just want to keep some more liquid capital in your pocket.

Some loan officers don’t know you can do that (mine didn’t on mine!) but you live and learn haha.

I also have a buddy that just did a 203k in Connecticut on a 3 fam. They’re still an excellent vehicle if you can find distressed deals!

@Bob Ross

In general the FHA 203k is better if you're doing a 2-4 unit because it's 3.5% down payment regardless of number of units.

The HomeStyle has a varying down payment requirement depending on number of units. 3% down for single fam, 10-15% for two fam, and 25% for 3 and 4 fam depending on first time home buyer status.

The other thing is HomeStyle generally looks for a better credit score. FHA guidelines require a 580 score minimum, where HomeStyle generally looks for a 680+.

Remember, wholesalers typically are looking for cash only, because they usually have a date to close by.

Another thing to consider is if you're looking to use a 203k, the lender isn't going to pay a wholesaler fee as part of the proceeds of the seller's proceeds. 

FHA won't want to see that on the closing statement. It's a tricky situation.

Unless you can somehow work out a side deal with the wholesaler, buying from wholesalers with a 203k is tough.  

 Unfortunately, homestyle only allows investment properties that are single family. So that wouldn't fly. 

Shahidul - have you explored hard money lenders? 

I'm literally about to do this for my home I'm searching for now for my wife and I!

I did a 203k a few years ago to start my portfolio, now am going to use it again, only this time to help build my forever home with my wife and growing family. 

I think your strategy is awesome! I'm in the process of doing the same and already have a lead I'm looking at tomorrow afternoon!

Here's what I'm going to do:

1. build rapport with the seller. Just be friendly and cordial! Find common ground on things, maybe things in their house that are interesting or conversation starters. 

2. learn a little more about their motivation for selling? Ask questions like - so what are your plans after you sell? is there a time you want to get this sold by? 

3. learn more about the house itself. Get as much information as you can. How old is the roof? furnace? look around for water damage, leaks, etc. 

4. look to see what theyre looking to get for the property. Ask them how they came up with that number? 

5. start to tell them your concerns, where you feel you're at price wise. then begin to negotiate.

Ultimately, this is a people business. People only sell to people that they like.

Don't look at the person as someone you're going to take advantage of to get a deal.

Look at the person as someone that has a problem they're looking to solve (trying to sell their house) and find the best way you can help them with that that benefits both of you!

Good luck!

Hey Clayton - 

First off, congrats on using the 203k successfully on your first BRRRR/househack! That's awesome. I got started very similarly!

To answer your questions. 

1. Your underwriter on your next loan is going to see what you're doing. Now, technically, you're moving out of your first, refinanced out, and no longer have the FHA. Lenders will definitely challenge you on this. This loan isn't meant to be a flipping loan you do over and over again, but if you have good reason and are playing by the rules, it can be done. Would it kill you to wait the year before your next one?

2. Again, you can use another 203k to go into another property. But, your underwriter will challenge you on this. Why are you moving so soon? Why would you go from one 3 unit, into another 3 unit for your own home you want to occupy? Does that follow conventional wisdom?

3. Yes, there are a few. The Fannie Mae HomeStyle, Freddie Mac Choice Renovation, and some other oddballs here and there. But those are the most popular products. Those loans generally are similar to the 203k. I'd say the main points that might concern you would be that the HomeStyle down payment requirements rise with the amount of units you want to buy. Unlike the 203k which is 3.5% flat across the units, HomeStyle ranges from 3% down for single family, up to 20-25% down required for 3-4 units. 

I love your enthusiasm to roll right into the next one, but in my experience, just let time do it's thing. Many doors will continue to open for you if you make good deals. 

You won't have to keep leveraging owner occupant loans to the point of flagging lenders from wanting to work with you. 

You have some equity now. Look into combining that equity with some more conventional loan products, or hard money lenders, etc. 

I absolutely love the 203k and the power it has, but ultimately, it is a logistically intensive process compared to other methods. 

Best of luck either way, man. And congrats again!

@Ariel Drilon

On a conventional I’m pretty sure you can do the same thing. Just ask your lender!

I did the 203k and did a refi into conventional immediately after the rehab was completed. It dropped my PMI but also got me a slightly better rate, which is common since reno loans of all kinds have slightly higher interest rates than conventional.

@Ariel Drilon

Hi Ariel -

To start, it seems like your lender isn’t that experienced with this loan. I’d start shopping around more to find lenders that do these day in day out. There’s a number of ways to find these guys. I have a tip where you can find lenders doing the most 203k’s in your market but looking up the “203k endorsement summary”, going to the most recent month, and searching through the document for your market and finding who has done the most in the last month/fiscal year.

To answer your question about occupancy during construction, there is an option in the 203k loan to wrap up to the first 6 months payments into your loan to prevent you paying out of pocket during the rehab. (my lender did NOT know this and I was stuck paying for a house I couldn’t live in - which was fine, but would have been nice to know!)

Regarding running the project on your own, yes, you are in charge of the project at the end of the day. If you use a 203k (or even conventional reno loans like the homestyle) the bank will assign you a HUD consultant or rehab consultant.

They’re beneficial in the sense that they’re basically a referee between you, the contractor, and the bank.

They also help you create a scope of work, that you can then give out to contractors as a baseline for their RFP (bid/estimate)

They come and inspect the contractors work periodically through the project at your discretion, check what progress they made, and then release the funds pro rata based on how much they’ve completed.

You get an objective third party to check progress.

However, you’re still in charge of making sure that your contractor stays on schedule.

@Gerrett Houston

Ideally the process should look like this.

You have some contractors vetted from your personal network, online resources, professional network, to call on once you find a property.

Once you get into contract, first person to step into that property should be a HUD consultant. (Homestyle they're not required, but some banks will require it anyway - I'd argue that you should hire one regardless)

They will create a feasibility study, and an SOR or schedule of repairs.

This document will let you know what needs to be done to the property for it to be up to code + HUD quality standards, and will also list out by line item whatever work YOU would like done.

The consultant will then give you this line item list, which they often accompany by rough estimates of labor + material cost per line item.

THEN bring in as many contractors as you can to walk the property, using the SOR as a bid sheet. Have them basically fill in the SOR with their labor and material numbers for each line item.

This will make sure that the bids are leveled, and things don’t get lost in translation which is very common with people that don’t understand construction.

Then from there, you negotiate and pick which contractor works best for you.

Get the best contractor you can afford. Don’t go for the cheapest price. Cost and price are two different things. Lowest price often costs you more in the long run.

Also, make sure to have a soft start date agreed upon with the contractor. You don’t want to close on the loan then find out the contractor is backed up for 6 weeks.