By and large, Contractors are a tradesmen, some better businessmen then others, but nonetheless, the primary need is for them to be good at what they do, their trade. When we, as comsumers/homeowners, need to find a contractor to do a renovation job for us and we utilize the FHA 203k loan progam, it can be quite difficult to find a contractor that is qualified or even interested in doing this work!
Below are some items that will help you understand why and perhaps help clear up this disconnect and bring you to understanding during your contractor interview phase.
1. Contractors do NOT get money up-front: (this is only true for a full K, not an FHA 203K Streamline [see previous blogs on differences between full k's and streamlines]). The streamline is relatively new, so most contractors will hear of the 203k and say "No Thanks". Make sure you are clear as to the type of K you are doing and communicate the pay structure to the contractor during this process. Plain and simple, most contractors are accustomed to receiving 1/3 of their contract upfront or during contract signing. This is "seed" money to start the project and buy materials and front some labor expense. GOOD contractors will not spend this money and keep it set aside for the job, budget enough to carry them to their next draw and hold profit until the end of the job... but alas, not all contractors are created equal. Since the K allows for no inital draw until work items they are requesting the draw on are completed, this limits the contractors that will even take this kind of job as not all have the money to front for labor and material.
2. Contractors must pass Muster: It is a requirement of the FHA lender to evaluate the contractor's credentials and qualifications and document these items. When a contractor signs on to do this K, he must have his documents in order. Local Licensing, regulatory licensing, liability insurance, worker's compensation insurance, trade references, ability to provide a properly written contract, all are checked and copied. They are required to sign all necessary 203K docs as well, Homeowner/Contractor Agreement, Specification of Repairs, etc... where they typically have not seen this paperwork and may seem overwhelming to them at times. Bottom line is, these checks are there to protect the homeowner, so the contractor you select must not mind the microscope. :)
3. Contractor Bids are scrutinized: Typically, an FHA 203k Consultant is utilized in the transaction. He will be on the job for the duration of the project, from working out the items required to bid the job, to filling out all draw requests and inspecting all work to ensure it was done properly and professionally. I would liken it to not only having a micromanaging boss that is constantly looking over your shoulder at what you do... and you can't do anything about it. THIS IS A GOOD THING for the homeowner. They should have another set of eyes on the job to ensure work is being bid and finished professionally, but there are only certain contractors comfortable enough with their work to continue to sign up for this...
4. Check Delay /Holdback: If a new shingle roof is the first item on a large renovation (and typically is as getting the house "Under Roof & Waterproof" is done first), for instance has a total line item price of $15,000.00, when the roof is completed he will request the draw. Every time a contractor requests a draw, the HUD 203k Consultant comes out, inspects the work, and details the percentage of that line item completed on the draw request, in this case 100% completed, so the draw request is $15,000.00. That draw request must be signed by the homeowner, contractor and Consultant, then forwarded to the draw department servicing the loan. These departments have varying work loads, and if you catch them when they are backlogged, it could take up to 3-4 WEEKS to receive that first check! (typically, they are 10 days or so). In addition, they do NOT receive the entire 15K for that draw. The draw department will keep 10% of every draw as "HOLDBACK". This money sits with the draw department as a bit of an insurance policy for the contractor to complete the entire project, then that money is released. This was enacted to counter those contractors that would take the K jobs, cherry pick the "money items" on the work write-up and then abandon the job. Once again, measures that protect the Homeowner, but one more item that makes it difficult for the contractor.
The answer here is understanding the guidelines and setting proper expectations through communication. The will ensure nice workflow throughout the entire project and no surprises for either party. :)
Good luck, enjoy your lives, buy houses, make them homes and make equity!