203K: Why is it so difficult to find a contractor to do this 203k? Answers within...

By
Mortgage and Lending with Senior Vice President, Secured Funding Corporation
https://activerain.com/droplet/4vRw

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!

 

Kluge Out!

 

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Re-Blogged 7 times:

Re-Blogged By Re-Blogged At
  1. Gordon Sloan 09/17/2010 12:04 AM
  2. Patrick White 09/17/2010 12:16 AM
  3. Dan Edward Phillips 09/20/2010 05:17 AM
  4. Bob & Leilani Souza 09/20/2010 09:17 AM
  5. Roy Kelley 09/20/2010 09:28 AM
  6. Loan Survivor Real Estate Financing Expert 09/22/2010 12:39 AM
  7. Deborah "Dee Dee" Garvin 09/22/2010 01:30 AM
  8. Mike Young 06/16/2013 09:24 AM
Topic:
Mortgage / Finance
Location:
Maryland
Groups:
Mortgages
Tags:
fha
baltimore
md
renovation
reo
rehab
repo
fixer upper
bank owned
as is
foreclosure
203k
hud
short sale
brent kluge
new penn

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Rainmaker
645,412
Dan Edward Phillips
Dan Edward Phillips, Humboldt and Del Norte Counties, CA - Eureka, CA
Humboldt and Del Norte Counties, CA

Good Morning Brent, very good post! Great job of explaining a difficult program to deal with.

Sep 16, 2010 11:47 PM #1
Rainmaker
581,678
Gordon Sloan
Group1 Real Estate, selling houses in Salt Lake City Utah - Salt Lake City, UT
Salt Lake Homes For Sale, Salt Lake Real Estate

Brent, I am going to re-blog.

I think this program is going to make us money and serve some of our clients well.

Sep 16, 2010 11:49 PM #2
Rainer
69,325
Brent Kluge
Senior Vice President, Secured Funding Corporation - Rockville, MD
I do mortgages REALLY well and I WON'T RIP YOU OFF

Thanks Corie!  To you and to all, please feel free to reblog and ask away any necessary questions!  By the way, I can lend in 42 states now!  ;)

b

Sep 16, 2010 11:53 PM #3
Rainmaker
721,837
Patrick White
Home Driven Realty, Inc - Baldwin, NY
Driven to bring New Yorkers home

Good Morning Brent,

Thanks for the post.Dennis and Teresa Walsh have developed Re-Build USA program with a 203k Specialist Designation. Part of the program is are portals with Lowes and local contractors. I am going to re-blog this. Thanks for sharing.

Sep 17, 2010 12:02 AM #4
Rainer
88,546
Paul Lesieur
203kloanmn - North Oaks, MN

Do you lend in Minnesota, I am a 203k consultant in the Twin Cities. I also give seminars to lenders, contractors and homeowners.

Realtors have not responded to my seminars, not yet anyway. When they do they will learn this is a great way to sell homes. Up to $365,000 in this area.

Sep 17, 2010 12:35 AM #5
Anonymous
Garrett Feis

Good article Brandt.  You are correct about the contractors.  Nobody wants to deal with contractors that are not financially stable or one that's not fully licensed and insured.  Having done 203k consulting for 20years now, we still have the same problems.  Every contractor wants to get involved but, does not have the correct insurances or licenses. 

So, what the lenders are doing is checking out the contractors to make sure they are legitimate businessmen. I know several 203k contractors here in Atlanta that don't require any "up front" or deposit money to get a job going.  They are willing to invest their money in the job and get reimbursed as the job progresses with regular draws.  This is how commercial construction goes every day.  Nobody in commercial construction ever gets a deposit. 

My advice to any home buyer is to tell the contractor to call the consultant before they submit their bid.  Doing this allows me to inform the contractor of his roles and responsibilities under 203k guidelines.  Once explained, some will refuse to quote the job but, the ones that do, understand whats going to happen in the future. 

Sep 17, 2010 08:36 AM #6
Rainmaker
990,945
Bob & Leilani Souza
Souza Realty 916.408.5500 - Roseville, CA
Greater Sacramento Area Homes, Land & Investments

Brent, this is the best blog I've seen that explains the 203k process...I'm going to re-blog it! :)

Leilani

Sep 20, 2010 09:14 AM #7
Rainmaker
70,752
Loan Survivor Real Estate Financing Expert
Purchases, First Time Buyers, Pre-Approvals, Refinance - Birmingham, MI

Brent, great article!  Another big stumbling block on 203k's is buyers wanting to do the work themselves.  Creates all kinds of problems!

Sep 22, 2010 12:36 AM #8
Rainer
147,896
Don Spera
CR Property Group, LLC - East York, PA
Serving York and Adams County, PA

One of the major problems in our area, it is not publicized enough.  More and more properties are distressed and when the people leave, they take everything but the kitchen sink (well some even taken that).  I feel there should be seminar's strictly given on this program, so we all have a better understanding on how to handle things when they come up.  It is nice dealing locally with a lender, but we may not have any other alternative if we cannot get the service for our client.

Sep 22, 2010 01:27 AM #9
Rainmaker
157,484
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Brent,  Thank you for the opportunity to re-blog.  I am building quite a following on this product and really enjoy working with it.  Addressing Drew's comment, my company will only allow homeowner's to do the work under the license of the GC...therefore it is his/her risk not ours.  The practice certainly limits the "Handy Dan's" involvement in the project.  Great information and very nicely defined.

Sep 22, 2010 01:34 AM #10
Rainmaker
157,484
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Brent,  Thank you for the opportunity to re-blog.  I am building quite a following on this product and really enjoy working with it.  Addressing Drew's comment, my company will only allow homeowner's to do the work under the license of the GC...therefore it is his/her risk not ours.  The practice certainly limits the "Handy Dan's" involvement in the project.  Great information and very nicely defined.

Sep 22, 2010 01:34 AM #11
Rainmaker
157,484
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Brent,  Thank you for the opportunity to re-blog.  I am building quite a following on this product and really enjoy working with it.  Addressing Drew's comment, my company will only allow homeowner's to do the work under the license of the GC...therefore it is his/her risk not ours.  The practice certainly limits the "Handy Dan's" involvement in the project.  Great information and very nicely defined.

Sep 22, 2010 01:34 AM #12
Rainmaker
157,484
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Brent,  Thank you for the opportunity to re-blog.  I am building quite a following on this product and really enjoy working with it.  Addressing Drew's comment, my company will only allow homeowner's to do the work under the license of the GC...therefore it is his/her risk not ours.  The practice certainly limits the "Handy Dan's" involvement in the project.  Great information and very nicely defined.

Sep 22, 2010 01:34 AM #13
Rainmaker
3,447,685
Dorie Dillard
Coldwell Banker United RealtorsĀ® ~ 512.346.1799 - Austin, TX
Serving Buyers & Sellers in NW Austin Real Estate

Good morning Brent,

This is an excellent post. I just read Deborah's re-blogg so came over to let you know your post was concise and full of valuable information.

Sep 22, 2010 01:39 AM #14
Rainer
69,325
Brent Kluge
Senior Vice President, Secured Funding Corporation - Rockville, MD
I do mortgages REALLY well and I WON'T RIP YOU OFF

I am glad this information helps in any way. Please feel free to come back to read my weekly blog regarding new developments in the renovation world.  Please forward this information to anyone you think may have a question.  I am here to help.

 

Drew, thanks for the point about another issue being borrowers wanting to do the work themselves. I will make that the topic for my next blog!

 

Best

 

b

Sep 22, 2010 06:14 AM #15
Rainmaker
108,209
Kevin Hancock
Evergreen Home Loans - Poulsbo, WA
The Hancock Mortgage Team

Great post Brent!  One bright side for contractors is that once the work is completed, they know they will get paid even if it's not in the exact time-frame they might prefer.  Better than doing the work and then getting paid less because the homeowner runs out of money.

Oct 15, 2010 12:48 PM #16
Anonymous
Nate Lyon

This is a really good post Brent.....thanks.  We are a GC in Central Florida that knows the 203K process very well- both full and streamline.  I am the operations manager and my main focus within the company are the 203K's.  I think many Realtors' shy away from them for the main reason that it is hard to find a good contractor that is qualified, licensed, understands the process and also understands good business practices.  I wish I could help you all out but we are only serving Orlando and the surrounding Counties in FL right now.  If you know anyone in the area including realtors, mortgage companies or potential buyers interested in a 203K please let them know we are here.  You can check us out at www.all-in-cs.com

 

Good luck!

 

 

Jan 17, 2013 06:17 AM #17
Rainmaker
601,348
Mike Young
203kOnLine.com, covering the USA - Las Vegas, NV
FHA 203k Consultant 916-758-1809

Brent, this is a good post and I think I'll reblog it too, nice job.

Jun 16, 2013 09:19 AM #18
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Rainer
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Brent Kluge

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