Recently in one east coast town a lender hired a consultant and the consultant called the client to set up the appointment. The consultant indicated he would need to pick up his fee at the time of the inspection and it would be $719 which included the mileage fee.
The client proceeded to tell the consultant that the lender told him it would only be $400 and they would bill the balance to the escrow if they decided to move forward with the project. If we move forward then the rest of your fee would be billed to the escrow and you would credit the $400 paid for the feasibility report to the full report.
Lets step back and look at this from the lender's prospective
1) Lets order a "feasibility report" and see if this project is even doable... [sounds good for everyone]
2) If it is feasible to move forward we will order the full consultation
3) If it dies here the client is only out the $400 feasibility fee [Good for the client too]
Problem for the client
1) The feasibility analysis is a very quick run through the property, NOT a home inspection. This takes right at 30 minutes to conduct the actual field inspection. We are just looking for the deficiencies to bring the property to the FHA MPS {Minimum Property Standards]. This is a "tool" that helps with the negotiation of the price with the seller.
2) The client may want more than this, the client may want to know how much it will cost to add the new kitchen and bathroom as well as to meet the MPS. This makes it a "consultation" and it is no longer a feasibility. This is fine but changes the game plan.
3) A feasibility report, by design, is "INSUFFICIENT" to solicit bids. If you give the client more than this it is the consultation/home inspection/full report and no longer a "feasibility" and the consultant has earned his full fee.
4) A feasibility report is a separate product and used ONLY to help with the negotiations of the sales price when used properly and benefits all concerned.
5) If the project is a viable project and looks like it will fly there is no need for a "feasibility" in fact it wastes time and slows the closing.
6) What we do different is to make the full inspection, if upon that inspection, it is found this project is not feasible, we flip it to a feasibility and write the limited report so the sales agent has a tool to renegotiate the price and then we charge the lessor fee. But we have had the time to actually inspect the home more fully and now have a much better idea of what is needed.
7) If we go out to do a feasibility report and run through the home quickly make the report and then the full consultation is required, It will require another more extensive inspection and thus carries another "full fee" for the new product.
We have done hundreds of "feasibility analysis reports" and they typically result in saving the client $15,000 to $75,000 and some have saved the client from buying a home that would have slid off the hill. I remember one that there was so much subsidence that I was able to show the client where the home had actually moved nearly two feet towards the street. The fix was about $200,000. The agent called me later and said the sellers hadn't disclosed that fact but seemed to know it when they dropped the price by $175,000.
My question to you is "was the $350 fee we charged for this feasibility worth the fee paid?" Of course it was, so was the one where the sales price was dropped by $15,000. It clearly has it's place.
When doesn't it have it's place?
If you are trying to close fast, then don't waste your time with a feasibility report. When you provide your consultant with the "construction budget" figures order the "full consultation" and with that budget in mind we make the proper inspection at the get go, and allow enough time to do that. In the event we see the project is way over budget we automatically change gears and provide the lessor report at the lower fee and send the Realtor back to renegotiate the price.
Lets address collecting our consulting fees up front which is standard practice
The consultant is like a home inspector or appraiser in that regard, we all collect our fee up front. The unique thing about our fee is that it is typically reimbursed to the borrower at closing of the loan. You can actually provide an "escrow instruction" to your title company or attorney and let them know you have paid $729 (in this example) to the consultant and you want that accounted for and added to the borrower's contribution to the escrow.
The FHA guideline is very clear on the collection of our f
Conclusion
If you want to close faster order the consultation. If you have lots of time by all means, order a feasibility but if you want to save money and want to move into high gear to get your loan closed faster then order the Consultation and forgo the feasibility report. As long as your consultant has your construction budget in hand, you should move much faster to a close. Payday for you and then the work can begin.
downtown 9-28-2021
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