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I almost insist that anyone who is getting 203K Renovation Loan, full blown 203K loan or a streamline 203K loan, hire a hud consultant to prepare the work write up.

Why would I pay a hud consultant when I am doing less than $35,000 in renovation?

Although HUD did away with the old VC sheet on appraisals…FHA appraisers can and still do call for repairs to be made prior to closing.  Most consumers, Realtors and loan officers don’t know what the appraiser will call for until after the appraisal is complete.  By having the hud consultant walk through the property prior to the appraisal, any repairs that will be called for by the appraiser are addressed in the work write up and can be completed as part of the project.  By doing this upfront it will eliminate the scramble after the appraisal comes in.

I recently was asked this question and thought it would be a good blog post.

The technical answer is yes, however you need to be careful if you decide to fire your contractor. 

1st and foremost the contractor you are firing will need to be made whole.  They will need to be paid in full for the work they have completed.  The tricky part is they will have to agree with you that they are being paid in full.

You will have to work with your lender to get the new contractor approved.  You will need to get a homeowner/contractor agreement, W9 and License if required by the state.  If you do not have enough funds remaining in the escrow account to pay the new contractor and keep the original contractor whole, you will need to have additional funds available to complete the project.

It can be done, you just don’t want to do it on a whim!

I am working on a deal that was originally with another lender as a purchase 203K, the other lender ended up dropping the ball to the point the borrower switched lenders in the 11th hour to close the loan on time as a regular FHA loan.

The borrower purchased the home and has started the renovation on his own, mainly demolition (I don’t recommend doing this prior to closing on a renovation loan).  So few lenders are actually doing these renovation loans….. he ended up back with the original lender trying to do the 203K loan as a refinance. 

While going through the process he came across some of my posts and blog on Zillow.com (thanks for the referral Zillow) and reached out to me.  Because he was so far along in the process I answered a few questions and coached him a little as to how to deal with the current lender to try and expedite his loan closing.  Three weeks go by and he is no closer to closing than he was when I spoke with him originally.  So he decided to apply with me.

I was walking through the project with him when I noticed the house was going to need to be painted and also knew that the proposed budget only had about $250 in it for minor painting.  I knew by looking at it that it was going to cost more than that!  I have to admit that I don’t go out and see every house I write a renovation loan on, although I do need to have a complete understanding of the project so I can spot potential hiccups and delays and address them up front.

Having done these loans for years I have a ton of experience with them and my customers get the benefit of that experience.  It is really tough to explain all the benefits of experience.  Much of what we have learned through experience is 2nd nature and you just do things differently. 

I have a three year old daughter and I am amazed almost moment to moment as I watch her develop.  It is the things that we take for granted I find the most interesting, the way she eats, gets dressed, walks up and down the stairs, climbs over under and on whatever gets in her way, and a zillion other things.  At some point we learn what works best.  We learn that walking around the table, although it may take a little longer than going over or under (or not), may be the most efficient way to get to the other side.

When working with an experienced lender and or experienced renovation lender their experience will make your experience much less stress full!

Below are some of the things I try and walk around:

1.      Self Help – These are almost always a recipe for disaster and I really discourage anyone from attempting to do these projects as self help

2.      Streamline Renovation – 203K streamline although less expensive by about $800 in costs, I have seen too many issues arise as a result of half the funds being disbursed upfront and contractors disappearing or demanding additional payment upfront to finish. 

3.      Cutting corners – eliminating $5,000-$15,000 from a project because you are spending more than you want.  The difference in your payment is usually minimal, and to go through a renovation project and settle for less than what you want tends to do nothing but generate regrets.  If you are going to do it…do it right!

4.      Hud Consultant – Make sure you are working with a good 203K consultant.  I have been working with AM Consults in Malden MA for well over a decade and am extremely hesitant to work with any other consultant.

5.      The Loan Officer – Choose a loan officer that has the experience actually writing these loans rather than the loan officer that just has access to the program.  The loans are more expensive than a standard loan so expect to pay a slightly higher premium for the loan, but don’t get taken advantage off.  I have seen on more than one occasion an LO charge a ridiculous amount for these loans…The Mind set being if the customer is willing to pay that amount I’ll figure out how to write the loan…They may figure it out but you don’t want to over pay to be a guinea pig (sorry animal lovers).

I had a great comment on my blog about shorts sales.  I felt both the questions and answers deserved their own blog post.

Question: How much was paid to the homeowner to contract the rights to buy a house facing foreclosure to try to pre-sell it to someone else for profit?

Answer: Why do you assume that the homeowner was paid anything?  When a Realtor negotiates a short sale placing the home in a listing agreement, what do they compensate the homeowner?  To the best of my knowledge the compensation is simply getting out from underneath the house without having the home foreclosed on.

Question: By marketing houses at a higher price then that required by the bank they are increasing the chance that no buyer will be found and the house will foreclose.? The compensation to the homeowner for this is?

Answer: Why would marketing the house at or below market value increase the risk of foreclosure?  LMSG is negotiating the short sale based on their cash offer.  If they cannot get the bank to accept a cash offer for below market value then no short sale occurs, no different than when a Realtor takes a listing in hopes of negotiating a short sale.  If the bank won’t accept the offer the sale doesn’t go through.

Question: Technically, contracts are legal and binding if they offer a benefit to both parties. A normal RE agent contract for a short sale covers listing and bank negotiation processes. What is the compensation to the homeowner for contracting LMSG to have rights to sell their property and is the compensation fair relative to the increase risk of foreclosure?

Answer: I am not an attorney…nor did I sleep at a Holiday Inn express last night (anyone think I can get paid for product placement on my blog?).  But my understanding of a binding contract is that it consists of 3 elements: competent parties, consideration and mutual assent.  Your questions seems to revolve around what the seller gets in return for the services provided by LMSG and I see no difference between what the sellers receive from a realtor that lists and closes a short sale.  They get out from underneath the mortgage.

Question: Aren’t there laws in effect about presenting all sales offers to sellers (and selling banks) and not hiding some for personal gain?

Answer: Again I am not an attorney, so without a doubt, consult one…but the seller not the bank is the owner of the home.  The seller has accepted LMSG’s offer to purchase the home in a short sale, provided one can be negotiated.  I don’t see why the bank would need to be made aware of any offers made to LMSG to purchase a property that neither currently own.

Question: My experience is that most times banks do not allow compensation to the homeowner in a short sale.

Answer: You seem to be looking for a smoking gun….in that the seller is being compensated in some way other than simply getting out from underneath a mortgage they cannot afford.  I have been doing the same thing since the first deal was brought to my attention.  I am a skeptic at heart but can’t find the problem with the business model.

This is probably the most frequently asked question I get when I start talking about renovation financing. My questions to anyone thinking about a Do-It-Yourself (DIY) renovation:

1. What is your hourly rate?
2. How many hours will the renovation take?

Most projects end up taking longer than you originally estimated, cost more than you anticipated and require tools you don’t have!

In this example, a DIY renovation can cut the total cost by $15,000, with monthly savings of $82.  

The question is: Do you want to do the work yourself?

I was recently asked this question and these are the ways I am aware that folks can pay for home improvements.

• Cash – With out a doubt the easiest way.  If you have the cash odds are it will be your best option, but not always.
• Contractor Financing – This would be when the contractor actually funds the project and allows you to pay for the work over time.  I don’t know too many…(any) contractors that are in a position or willing to do this.
• Credit Cards – North of 10% interest rates.  Unless you anticipate being able to pay the cards off quickly I would venture to say that is a really bad idea.
• Home Equity Loan – A few years ago this was the preferred method.  Combine the decreasing home values with equity guidelines decreasing the Combined Loan to Value ratios 100% down to 80-85% max.  Currently few if any folks actually have the equity in there homes to obtain an equity loan.

The 1st four sources have some common problems with paying for improvements on a purchase transaction.  If the repairs are need to have vs. nice to have, the repairs will need to be made prior to closing on the purchase.  Paying to repair a property before you own it is probably not the best idea.  Fannie Mae, Freddie Mac, FHA & VA all have minimum property standards that must be met prior to the loan closing, unless you are obtaining Renovation Financing.  Home equity financing has the added hurdle of being based on the current value of the property.

• Purchase or Refinance & Renovation Loans – Unlike equity loans or a regular first mortgage loan, purchase/refinance and renovate loans base the loan amount and your down payment off of the after improved value rather than the current value.  This enables you to tap into potential equity.

I got an e-mail yesterday asking: What is a 203K loan?  Every once in awhile I need to remember that I sometimes use acronyms and assume everyone knows what I am talking about.  The reality is…in many cases the acronyms do more to confuse folks than to clarify.  So I am going to take a step back and explain a little about the “203K” loan.

This loan program can be used for the purchase or refinance of a property that needs work.  It allows you to borrow the funds you need to purchase and renovate the property.  These loans are not new but took a back seat to other ways of financing the cost to renovate.  With property values no longer increasing by double digits, and with equity loans being capped at 70-80% of current values (rather than 100% you could get just a few years ago), the options for financing renovations are limited.  I started a thread on Zillow asking how folks are paying for home improvements.  Inquiring minds want to know! 

In addition to the FHA 203k program similar programs are offered by Fannie Mae and Freddie Mac.

I have been in mortgage lending since 1993, and until recently, I had never actually had a short sale close successfully.

One of the real estate agents I work with regularly, Rachel Hillman of Realty Executives, introduced me to Mike Ouellette of Loss Mitigation Specialist Group ( LMSG). For those that have followed me on Zillow, I am a bit of a skeptic when it comes to these types of things.
Rachel called me about a deal she had that was falling apart and she was hoping that I could pull the deal back together.

Basically, the way this company works is that they sign an agreement with the current owner of the home to essentially buy the home in a short sale. The current owner gives them permission to deal with the current lien holders. While they are negotiating with the current lien holders the property is being marketed. In most cases the property is listed and marketed by the agent that has introduced the seller to LMSG.

Unlike most short sales with this company LMSG actually buys the property after negotiating the short sale, then turns around and sells the property to a third party — the best offer that the listing agent is able to find.

The reason that Rachel called me in on this transaction is that many lenders have adopted the FHA anti flipping rule and are requiring 90-day title seasoning.

Reducing the length of time they need to hold the property increases the profit margin but also allows them to list and market the property at a more competitive price generating more interest and multiple offers.

Nobody works for free and I don’t begrudge anyone for making a living. Many lenders shy away from these transactions, some will even say that Fannie Mae and Freddie Mac have the same title seasoning requirements that FHA have.

Currently that is not the case. The concern is fraud and you can read Fannie Mae’s guideline on these transactions here and Freddie Mac’s here

Essentially both agencies have the same concern that the sales price is over inflated. It is critical that the underwriter and the loan file support the sales price from LMSG to the end buyer.

It is no secret that is costs the banks real money to foreclose on a property.t is also no secret that the property value is…. what it is! The bank has no guarantee, that if they foreclose on the property, that they will be able to sell the property for its current value.

If you know what you are doing you can essentially cut a deal with the bank for an amount less than the property is worth and likely a little more than what the bank estimates it will cost to foreclose on the home.

If the bank agreed to a short sale, before they foreclosed, and sold it for $195,000 rather than the $250,000 they would reduce their losses by $5,000 and eliminate the risk of the property value decreasing further and increasing the banks losses. For this to work you have to know what it costs the bank to foreclose, I just told you so that’s not such a big deal.

The real trick is knowing who to call and how to negotiate the short sale or you end up in lender limbo waiting for a response that you may or may not ever get! All the while stressing about what is going on!

I have closed 2 of these transactions and it almost seems too good to be true! These are the real numbers….

Property One: Purchased for $207,000 Appraised for: $225,000
Property Two: Purchased for $220,000 Appraised for: $255,000

Both appraisals were done post-HVCC so I know if anything, these appraisals are on the low side.

How many transactions have you seen recently that are appraising 15-20 thousand more than the sales price?

If you want more info on short sales you can read Mike’s Blog. Mike works with Realtors, Lenders, Attorneys, and Sellers.

Well….I figured I would give YouTube a whirl… I finally got around to putting some before and after photos together from a K loan I closed on 12/28/2008.

Purchase Price $192,000

Cost of Renovation $32,642

After Improved Value $260,000

Equity After Renovations $35,000+…..$33,000 can make a HUGE Difference!
I sent my clients a link to my blog when I posted it….This was her response:
“Wow, so cool that you used my pics    A month ago another lady was driving by and said she was an appraiser using my house as a comp.  She came in to see the improvements and then when we queried her on what she thought we’d be able to get for this house today she hemmed and hawed, then said, prices have dropped since we bought so we’d probably lose money…. because she can see we’ve put in a ton of money (not true, but that’s what she thought).   Then she said in this market with the economy so bad, I’d be able to get $350,000
That made me very happy ”     -Owner of the home in the video

This was the name of the presentation I was lucky enough to attend today that was presented by Doug Duncan Vice President and Chief Economist for Fannie Mae.

I gleaned a couple of things from the presentation.  As always these are my understanding of his presentation and as he had in his presentation I would also like to add a 10 page disclosure essentially saying that I cannot be held accountable for any of these predictions…If they come true…I accept credit…If they don’t…I was never here and never made these predictions!

1. The economic models we use to predict what we expect to happen are pretty much useless since we have no historical data that is similar to what has occurred over the past two years!  This really supports my theory that no one has a clue about what to expect…Even the folks we think should!
2. The Fed is going to have to start talking about an exit strategy from the credit and MBS markets.  Oh boy…I can only see this adding to the volatility of the MBS Markets regardless of what they do.  Investors don’t like uncertainty. At some point they will have to say how they intend to get out…Investors will have to figure out how that will impact the markets.  I have serious concerns that the unknown will have many investors sitting on the sidelines trying to figure out the new rules of the game before they start playing the game!
3. Rates will be going up.  The conventional rate markets are being artificially held low…when that stops margins and risk factors will likely rise.  I think a better gauge of were rates will be is to look at the real Jumbo Market rates.  Those rates are being set by the market and may paint a more accurate picture of what rates will be adjusting too.
4. The recovery will be SLOWWWWWW.  The majority of Americans’ are way over leveraged and it will take time for this to get back to sustainable levels.

What this all means…I am really not sure…But at least I know folks that are much smarter than I aren’t really sure either!