203k Consultants... How are they paid?
BIG QUESTION!
Here is the long and short of it. Back in September of 1995, HUD came out with Mortgagee Letter 95-40 which outlined the charges an inspector could charge. They were known then as a "Fee Inspector", now more commonly called a HUD Consultant. The mortgagee letter MANDATED a bracket system for these fees as noted below:
" A fee of $400 is acceptable for a property with repairs less than $7,500; $500 for repairs between $7,501 and $15,000; $600 for repairs between $15,001 and $30,000; and $700 for repairs between $30,001 and $50,000; $800 for repairs between $50,001 and $75,000; $900 for repairs between $75,001 and $100,000; and $1,000 for repairs over $100,000. "
Most people STILL use this as a ballpark for their fees charged, and I have even heard of some banks and even UNDERWRITERS quoting this as a guideline... lest we not forget that banks/underwriters can have "overlays" and basically say what they want.... Rogue jokers!
SO... HUD changes in HUD MORTGAGEE LETTER 2006-04
Now HUD wants to get OUT of the business of dictating fees for any inspections and this form supercedes the previous, opening up Consultants to charge just about whatever they want. GREAT!
So, by statute, HUD Consultants can charge just whatever they would like for the inspections, but you throw in the part that the LENDER is ultimately responsible for selecting the Consultant, now we have a bit of a quandry. I submit to everyone, Lenders and Borrowers alike... KEEP THOSE FEES IN CHECK!
Lenders, if your not looking out for your client's best interests and making sure the consultant you appointed is not OVERCHARGING your client, shame on you...
Borrowers, ASK to have your Consultant's details spelled out UPFRONT! Ask what the fee structure is and COMPARE it. Even though the old fees are not mandated, I have found that MOST Consultants are sticking to those fee structures. They seem fair and pretty well industry standard.
LASTLY: HOW IS THE MONEY COLLECTED?
This is a tricky one. Some Consultants COLLECT MONEY FOR THE INITIAL INSPECTION... this is fine, I think. After all, they are coming out, inspecting the property and utilizing their expertise. This ranges between $200.00 - $300.00. This should be paid upfront.
THEN there is the report that is written for the 203K loan docs. This complete Specification of Repairs, Feasibility Study and also other necessary loan docs, take time to prepare. They can be quite lengthy and detailed. This will include all work to be done, how much the total cost is, how much each line item is, a break down of labor/material, and VERY IMPORTANTLY, what is FHA required minimum property standard and what is elective. This is a very important piece of the renovation loan, for determining what work is to be done by the contractor and how to properly calculate the loan amount/rate/fees.
ALL CONSULTANTS ARE DIFFERENT HERE! Some will take the bracketed fees listed above and that will be the TOTAL Charge, and even SUBTRACT the initial inspection fee from that total amount. Others will Require both to be paid.
Some Want to be paid up to half of the amount to receive the reports and the remainder at settlement. OTHERS 
WILL WANT THE ENTIRE PORTION PAID UPFRONT, because in their experience, many don't make it to settlement, and they believe they can collect the entire amount upfront. The issue here is that the Consultant didn't "Consult" on an entire project if it didn't make it to the table. They didn't help negotiate with the contractors, advise the clients what should be done, which contractor might be over charging them, other renovation ideas, etc... Their entire fee isn't justified UNLESS the loan makes it to the table.
My advice is this... If you have a Consultant that wants to collect $300.00 to come out and inspect the property and as an example, the renovation amount is $150,000.00, so the Consultant says the fee will be $1,500.00. THEN the consultant wants to charge $150.00 for EVERY FOLLOW UP VISIT, I submit to you your customer is being gouged. It is your responsibility as the lender to keep the consultant fees/charges in check.
SOLUTION:
What seems to be standard is UP TO HALF of the Consultants fee can be collected upfront and no more. The rest of the fee will be paid at the table, should it make it there. Anyone asking for more... might ask themselves out of a job.
Go out, lend, buy houses, make equity and Love Life!
Kluge Out!
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