203K: "I am handy with a hammer" Can a borrower be their own general contractor?

203K Renovation loans are an amazing tool in this market.  This is by far the only loan that allows you to buy a house that is in less than perfect condition, then tack on money to fix it up and package it all in one nice loan with only 3.5% downpayment.  Not to mention, it allows you to go to 110% of the appraised value, with is a nifty little tool in this market as well... 

BUT, can the borrower be his/her own contractor???  Hmmm... lets examine.

 

If you start your google search, you will find that HUD has a "Self Help" program for the 203K that will allow for the borrower to be their own general contractor.  By definition, this is a wonderful possibility, however there is more to this than meets the eye.

 

 

 

Is this "Self Help" all its cracked up to be?:

Many homebuyers are frustrated with the 203k because they come into the project from doing their own initial research thinking they can swing their own hammer or perhaps even their lender advised them that this could be done as well. Invariably, late in the loan process, this becomes an issue and borrowers are forced to find a contractor for their project and watch the cost skyrocket.  I would even venture to say that some lenders SAY the borrower can do their own work, knowing full good and well that late in the game, they will have to switch to a contractor... (Hmmm... Bait and Switch come to mind???)

 

 

 

 

 

Main Points regarding 203k Self-Help Agreements:

 

1.  You will not be paid for Labor, Only materials and you must supply receipts for said materials.

This is non-negotiable.  You can NOT receive the typical funds paid to a licensed contractor and "profit" from doing your own renovation.  You most likely will have a better chance of gaining what is known as "sweat equity", meaning keeping costs as low as possible by not paying a contractor price for the renovation, and being in a better position for equity at the end of the project.  Please be clear here... ONLY MATERIALS COSTS WILL BE GIVEN ON A SELF-HELP RENOVATION K.

 

2.  You MUST prove you have the experience to manage your own construction project.

"I was a painter all through college", "I rehab houses now on the side", "My dad is a construction foreman"... you name it, I've heard it, I'm sorry, I wish I could help. You could be Picasso with a paint brush, Culk Hogan with a spackle bucket and Bob Villa with a hammer, but here is the deciding factor: CAN WE PROVE YOU HAVE EXPERIENCE TO MANAGE YOUR OWN PROJECT VIA YOUR TAX RETURNS OR TRADE LICENSE? 

Also: IF you have experience, WHAT is that experience in?  If you are a journeyman HVAC tech, does that actually mean you have experience running a project that entails structural repairs, concrete, framing, electrical, plumbing and the like?  Actually no.  It is the underwriters responsibility to PROVE that the Self-Help Borrower has the project experience SIMILAR to the job required on this particular loan and renovation.

 

3.  Do you have "seed" money to get work started on your FULL 203K loan, since money is not Advanced, but     released AFTER work is completed and inspected?

This applies only to the FULL 203k (not the streamline).  It is a requirement of the Lender to determine if you have cash to close, and even perhaps a reserve requirement. In a self-Help agreement, the Borrower will need to invest the "seed" money in order to get the project started and work completed before the first draw is released.

4.  Borrower will be required to carry additional insurance during project.

This also applies to full 203k's and not streamlines, but is important to understand upfront. When you have a major project (subjective to each lender as to what constitutes a major project), you will need additional insurance above and beyond your Home Owner's Insurance Policy.  The typical policy is known as "Builder's Risk" policy. This insurace is available to cover all workers, injury, liablity, fire, peril and other items due to and during a construction period.  HUD REQUIRES THIS and a lender worth its salt will too. PLAN on having additional insurance requirements, especially on a Self Help Agreement.

 

 

Possible ways of doing this:

 

1. Streamline 203k

If you have a project that is a Streamline 203k, you are still required to show you have the experience as listed in 1 above, however, you are allowed to SHOP for various contractors/tradesman.

Example:  Your project entails New HVAC system, New Roof, New Kitchen and various painting, drywall repairs and small electrical items.  You CAN shop HVAC contractors, Roofers and Kitchen specialists and submit different contracts for each and SAVE MONEY, as compared to giving it all to one General Contractor.  This is a great option of the Streamline K, IF you have the experience and ability to shop these guys and effectively run your project.

 

2.  Full & Streamline 203K

If you are using a Contractor as a General Contractor, meaning signing off on the entire project, YOU ARE RESPONSIBLE FOR NEGOTIATING THIS CONTRACT.  IF the contractor signs off on the entire project and guarantees that all the work will be performed for the estimated price, you may negotiate with your Contractor prior to inking that you would like to do various items yourself.  Will project stay on schedule and on budget and maintain quality?  It would be unacceptable for your involvement to impede any of these, so please keep that in mind.  My recommendation would be to just keep at arms length and IF you must hire a general contractor, let that contractor do their job and finish the entire project.  It is much cleaner when you can keep that independence, especially if something goes awry.

 

 

203K's.  Perfect tool for those not so perfect houses. :)

 

Go out, buy houses, renovate, make equity, Love your life!

 

Kluge Out!

 

 

Brent Kluge

1954 Greenspring Drive

Suite 625

Timonium, MD  21093

Office: 410-427-0588

Cell: 410-591-8300

Fax: 877-299-4262

E-Mail: bkluge@primelending.com

 www.203kworld.com