FHA 203k - Change in scope... beware!

By
Home Inspector with 203kOnLine.com, covering the USA S0289

Once your consultant and borrower have arrived at a scope of work and the appraisal is ordered the scope of work may not be changed. The scope of work is merely a list of items to be repaired or replaced but the appraisal will be based on those items being completed. If those items should not be completed for one reason or another it could affect the appraised value. It's very important to be sure that scope is followed to the letter.

During the course of construction there may be items that turn up that need repair that were discovered prior to the completion of the scope of work. These new items that have been discovered may be completed via change orders. Change orders must be approved by the consultant acting on the lender's behalf prior to the construction being completed on those items.

Example: once I had a contractor call me and explained that the dry rot and extended further down the side of the house and anticipated. As they removed the stucco they Finding more and more dry rot. When I asked how much is it going cost to repair this newly found damaged siding? The contractor responded $4,324. I suggested that he wait until I get a chance to look at the damage as that seemed a little high. He immediately replied how about $500. I then asked him what was going on and he informed me that the borrower actually wanted to install a zero clearance fireplace at a cost of $4,324. My question was why didn't he just say that the first place? He responded we didn't think it would be allowed. The fact is it could be allowed but now I no longer trust this contractor so what was the cost of the zero clearance fireplace?

Change of scope vs refinement of scope of work

What were talking about here is change of scope versus refinement when talking about is you may want to actually modify something that is in the scope of work which still doesn't change what were doing therefore it doesn't change the appraisal that doesn't change anything except maybe it's a color change maybe it's a material change for the better. As long as you're improving from where our scope was your fine. That is to say if we've called out carpeting and you want to upgrade to hardwood flooring that would have a positive effect on the appraisal not a negative effect therefore you can do that. What we see happening in many cases is are no price change somebody was able to say little money and upgrade the quality of material without a price change that's fine is no issues there that we need to deal with.

Therefore refining the scope of work is not considered a major change in the scope of work. A change in the scope of work to delete an item that was called out becomes a potential issue for the appraisal. The appraiser may have counted on that item for value. If, for instance, we were going to put a patio in and now we don't want to put a patio and that could have an effect on the value. However, if we were merely changing that patio to a wood deck they might cancel each other and therefore there's no value issue. This would be it considered a refinement of the scope of work rather than a change in the scope of work.

Note of caution: every now and then I hear a horror story where the loan closes, the contractor begins work, and on day one the borrower says scrap everything we've got written were going to do a whole different renovation. That will bite you in the butt. The original scope of work must be completed as laid out or with modifications, refinements, that become necessary during the course of construction. When the draw inspector is called out to do the first draw and nothing on their scope of work has been completed, even though many items have been repaired that weren't on the scope of work, no money can be dispersed.

Years ago I had one that the borrower decided to save money and asked the contractor if he could do the demo on the stucco exterior of this home and the demo on the drywall inside the home which both were to be removed totally. Contractor trying to be friendly agreed. They called me out to do the first draw saying the demolition was completed. When I got there the borrower had hired a bunch of workers from the parking lot at Home Depot, they did not speak the language he spoke, and when he told him to take the drywall off and take the stucco off they heard take everything off between the drywall and the stucco. When I got there the house had been removed from the foundation. This house I never thought would be completed luckily it was completed I was so happy to get off this job was over. Just be careful, you do not want this to happen to you. 

Posted by

Mike Young, 203k Team Leader    Mike ready for your 203k order

To learn more about the FHA 203k loan program go to www.203kOnLine.comWhat is your fee? 

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Rainmaker
1,037,066
Mark Loewenberg
KW of the Palm Beaches - Palm Beach Gardens, FL
KW 561-214-0370

great info to share on these type of loans that are infrequently used but very powerful

Apr 01, 2013 11:11 AM #1
Rainer
314,044
Jimmy Faulkner
Florida. Homes Realty & Mortgage - Wantagh, NY
The Best Of St. Augustine

You have to be careful who you are dealing with & the things that they would like to get away with. Being friendly or a nice guy could be a troublesome matter. You must stand firm

Apr 01, 2013 11:12 AM #2
Rainmaker
612,869
Mike Young
203kOnLine.com, covering the USA - Las Vegas, NV
FHA 203k Consultant 916-758-1809

Thank you for stopping by Mark

Hey Jimmy, you nailed that.  So many new consultants are trying to be everything to everyone  and it doesn't always work out that way as you seem to have found out.

Apr 01, 2013 11:16 AM #3
Rainmaker
1,179,733
David Spencer
Keller Williams Northland - Kansas City, MO
Show Me real estate in Kansas City
Oh, for the good olde days. Uncle Louie and the gang fixed it.
Apr 01, 2013 12:58 PM #4
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Rainmaker
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Mike Young

FHA 203k Consultant 916-758-1809
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