Ok, you have the house of your dreams under contract, anxious for a closing table to appear before you, and you’re ready to remodel.  As you start interviewing Contractors, you want to make sure you get the best man for the job.

In the rush of the excitement from choosing plumbing fixtures, cabinets, and tiles for a remodeling project, the most important decision you make won’t involve color swatches or sexy brochures.  It’s the Contractor you pick that makes or breaks the project. That choice will determine the quality of the craftsmanship, the timeliness of the work, and the amount of emotional & financial stress later on. To make sure you’re getting the best contractor for the job, here are a few questions to ask the candidates.

Have you talked to the Lender yet?

Great… You have invested some time and think you’ve found a few potential contractors.  You’ve talked to the former clients on each of their reference lists, now it’s time for one additional bit of footwork: making sure the Contractor has completed the “Validation Package” for the Lender.  Without this being submitted in a timely fashion and without this being formally accepted by the Lender, you won’t reach a closing table.  Inside this package there is a W-9, a Homeowner-Contractor Agreement (HOCA), a Notice to Contractor, and a Renovation Contractor Statement – to be submitted with proof of insurance, a copy of their STATE license card, and sometimes a copy of their drivers license.  So, have them budget ahead for doing this, and make sure they get it in… as this is often the point where the Contractor will walk away or become non-responsive.

Thanks, but can you fix this bid?

Now that you have a bid from the Contractor,  remember that renovations are more than one single item, and the bid should reflect that by being broken apart into pieces.  Many contractors prefer to give you a single price for your project, but this puts you in the dark about what they are charging for.  For example, let’s say the original plan calls for tile in the kitchen, but you decide to go with ¾” oak. How much should you be credited for that, or is it a Change Order that increases the price of the renovation? With a single bottom-line price, you have no way of knowing.  Plus, on a 203(k) loan, the 203(k) Consultant won’t accept a single price bid – it has to be broken down into the 35 sections that FHA recognizes on the Specification of Repairs.

On the other hand, if you get an itemized bid, it’ll show the costs for all of the various elements of the job—demolition, framing, plumbing, electrical, tile, fixtures, and so forth. That makes it easier to compare different contractors’ prices and see where the discrepancies are. If you need to cut the project costs, you can easily assess your options. Plus, an itemized bid becomes valuable documentation about the exact scope of the work, which eliminates disputes later.  Always, always have an architect prepare your permit drawings – this is the single most important decision you can make.

The contractor shouldn’t give you a hard time about itemizing his bid. He has to figure out his total price line by line anyway, so you’re not asking him to do more work, only to share the details that already exist. If he resists, it means he wants to withhold important information about his bid—a red flag for sure.

Is this an estimate or a fixed price?

Homeowners generally assume that the bid they just received is a fixed price, but some contractors treat their proposals as estimates, meaning that what you will end up paying for the project is basically undetermined. If he calls it an estimate, follow up and request a fixed price bid instead.  If he says he can’t offer a fixed price because there are too many unknowns about the job, then eliminate the unknowns.

Ask the Contractor to open up a wall, or pull off some siding to shed some light on what could be a big issue later on.  As you will have a building permit and permit drawings, ask your architect to address any changes that are discovered.  IMPORTANTLY, do not let the Contractor prepare the permit drawings – this is a conflict of interest and leaves the Borrower at risk.  If you simply cannot resolve the unknowns he’s concerned about, have the project specs describe what he expects to do—and if he needs to do additional work later, a Change Order can be issued that you BOTH agree to.

What side of town do you normally work on?

A good contractor who’s been renovating locally for 5+ years has an established network of subcontractors, suppliers and referral sources…with a reputation to uphold. That makes him a safer bet than a contractor who’s either new to the business or new to the area—or who’s planning to commute to your job from way across town.

You want to see a nearby address (not a PO box) on his business card—and should ask him to include one or two of his earliest clients on your list of references. This will help you verify that he hasn’t just recently hung his shingle—and will give you perspective from a homeowner who has lived with the contractor’s work for years. After all, the test of a quality job, whether it’s a bathroom remodel or a master suite addition, is how well it stands the test of time.

Who will I be seeing here every day?

Many contractors don’t actually swing hammers. They spend their days bidding new work and managing their various jobs and subcontractors. In some cases, the contractor you hire may not visit the jobsite every day.   So, the job foreman—the one who’s working on your project every day—is actually the most important member of your team.

Meeting him in person and seeing a job that he’s running should give you a feel for what is in your future. Plus, it gives the general contractor an incentive to assign you one of his better crews since you’re more likely to hire him if you see his A-Team.  If the contractor says he’ll be running the job himself, ask whether he’ll be there every day.  Again, he’ll want to give you a positive response—something you can hold him to later on.

Remember-- NO DEPOSITS TO THE CONTRACTOR ARE ALLOWED within the Full 203(k) program.

This is a great question, and I try to carefully explain this at each inspection...

Once the 203(K) loan has closed and renovation funds are placed into escrow, the Contractor quickly begins ordering materials, pouring concrete, removing walls, framing, etc, per the approved Specification of Repairs.  The 203(k) program is unique that it requires that the Contractor to provide ALL funds to begin the project, and they aren’t paid until the Consultant is called for a Draw Request or Change Order verification.

NEED MONEY?  IT'S TIME TO CALL THE CONSULTANT:

Inspections by the local permitting authority, the City or County, still have to occur as required by the General Building Permit.  Typically the 203(k) Consultant is called at the same time to verify that the Permit has been signed and all construction (labor and materials) have been put in place as set forth in the Specification of Repairs.  A maximum of 5 Draw Requests can be called in... typically they occur at 30/60/90% intervals and then the final 10% when the Punch List is substantially completed.  The fifth inspection is to insure that the property has been turned over to the Borrower in good condition,  and to release the 10% Holdback to the Contractor.

SITE VISIT AND STANDARDS:

The Consultant visits the property, is insuring that all FHA minimum standards are being met, the money is accurately and honestly being spent by the Contractor to directly improve the property, and construction is up to code (IBC Standards).  The Consultant should give you peace of mind - as you are NOT ALONE with the Contractor.

DOCUMENTS ARE SIGNED, AND CHECKS RELEASED:

At each Draw Request inspection, the Contractor is required to sign a Lien Waiver, insuring that all subcontractors and material suppliers have been paid.  This document is turned in with the formal Draw Request, is considered mandatory by the Underwriter, and insures clear title for the property.   The check generally arrives within 7 business days, and is issued in the name of the Borrower AND Contractor.

This is, without a doubt, the first thing that I am asked each time I meet a new client.  Often, the time and cost that it takes to meet and hire a Consultant is unexpected, and it helps to have a clear understanding of what my role is in the loan process. 

The 203(k) Consultant is a professional who has been vetted by FHA, to act as a Consultant to Borrowers, and help them through the different stages of remodeling.  It is essential that the Consultant have a clear understanding of remodeling, contracting, subcontracting, materials and contracts – because they each have unique roles here.

With that said… here’s how it works after the Borrower has chosen a house:

1. The Borrower meets the Consultant on site, bringing copies of all bids and prior inspection reports.

2. An agreement between the Borrower and Consultant is signed.

3. A $400 base fee is paid to the Consultant, based on HUD’s fee guidelines.

4. An inspection is performed to the residence, noting all deficiencies and existing systems.

5. The full FHA Package is submitted, typically next day, to the Underwriter, Lender and Borrower.

   (What’s in the Consultant's FHA Package?)

            Specification of Repairs

            Notice To The Contractor

            Borrower/Contractor Contract

            Certification Letter

            Identity of Interest forms

            W-9’s for the Contractor & Consultant

            First Draw Request form

            Self-Help Agreement (if Borrower is to be the Contractor)

            All specific form required by the Underwriter to close the loan.

6. If a major addition or remodel is planned, architectural drawings will be required.

7. All drawings are provided to the Contractor for bidding and permitting purposes.

8. The Consultant takes the Contractor’s final bid and adjusts the Specification of Repairs form, as all numbers have to match up before the Underwriter sends the loan to closing.

9. An Appraiser is sent to the site, along with a copy of the architectural drawings and the final Contractor’s bid, and determines the After Repair Value.

10.  Assuming all goes well with appraisal, all papers are forwarded to the closing attorney.

11. The Contractor pulls all required permits and the sawdust starts to fly!

12. As repairs move forward, the Consultant is called for a Draw Request (up to 5 times over the course of remodel) to review all work put in place, and funds are released to the Contractor for the determined value.

13. For each Draw Request, a Lien Waiver is submitted to insure clear title.

14. After all repairs are complete, the Consultant performs a final inspection, and the 10% Hold Back from the Contractor is released… and the Borrower can move in!