A 203k rehab loan can be a smart way to pay for your next fix-and-flip investment.
For one, it lets you finance both the property and your rehab costs in one fell swoop. On top of this, it also lets you do so quite affordably. (Since it is an FHA loan, after all, they have pretty favorable interest rates and terms).
There is a catch, though. In many cases, you can't manage your rehab project yourself -- no matter how experienced you might be in the business. On these loans, at least the "standard" version of them, you'll need to bring in what's called a 203k consultant to handle the job for you.
Are you considering an FHA 203k renovation loan for your next flip? Here's what you need to know before moving forward.
What is a 203k consultant?
An FHA 203k consultant, also called a HUD consultant or FHA consultant, is essentially a project manager for 203k-financed renovations. They handle all the paperwork required by the Department of Housing and Urban Development, they conduct assessments and inspections of the property, and they also determine when loan funds can be dispersed throughout the project.
Most of the time, these pros aren't solely 203k consultants. Many of them are also home inspectors, general contractors, architects, or others experienced in the industry.
Per the FHA handbook, 203k consultants are required on any project being financed by a Standard FHA 203k loan. They're optional if you choose the Limited 203k loan (these limit you to just $35,000 in renovations, though).
What exactly does a 203k consultant do?
A HUD 203k consultant has several duties when involved in a project. These range from conducting the initial "feasibility study" of the property down to the final inspection once all is said and done.
Here is a look at each of the consultant's duties in more detail:
- Feasibility study: The consultant will inspect the home and determine the necessary repairs to get the property up to HUD standards (essentially determining if it's a "financially feasible" project).
- Inspections: The consultant will do a series of inspections -- an initial inspection to identify any defects or problems in the home, additional inspections anytime repair funds are requested to be withdrawn from the loan, and then a final inspection of the property (after rehab) to ensure it meets HUD's standards.
- Architectural drawings and exhibits: If any part of the project requires architectural work, the consultant will either draw up the appropriate documents or work with a qualified contractor to generate them.
- Project and cost estimates: Consultants also put together work plans and cost estimates for the projects they're contracted for. These include details on what renovations will be done and how much labor, materials, and other expenses are projected to add up to.
- Change orders: In the event plans change during the course of the renovation, the consultant is responsible for putting together a change order reflecting the new work and costs.
Finally, consultants also keep the property owner informed throughout the rehab process. According to HUD rules, they're required to let the homeowner know about any lengthy work delays, deviations from the project plan, or health and safety concerns.
A breakdown of 203k consultant fees
A 203k consultant comes with several fees, including ones for the feasibility study, any work write-ups, inspections, change orders, and more. They even get mileage fees if they're required to drive a certain amount.
Here is a look at what each 203k consultant fee looks like per HUD policy:
|Feasibility study||To determine the financial feasibility of the project||$100|
|Work write-ups||To describe the planned work and its cost estimate||$400 to $1,000, depending on total project cost|
|Draw request inspection||To inspect the quality of work before issuing more repair funds (you'll likely request a draw inspection several times in the process)||$350|
|Change orders||For documenting any proposed deviations from the original project plan||$100|
|Re-inspections||When work must be re-inspected for any reason||$50|
|Mileage||For travel to and from the job site (as long as it's at least 15 miles away for the consultant)||$0.575/mile|
Fortunately, consultant fees can all be paid for using Standard 203k funds. So as long as you work these into your estimate when initially applying for your loan, you shouldn't incur any additional out-of-pocket expenses when employing a consultant.
How to find a 203k consultant for your project
The Department of Housing and Urban Development maintains a database of approved 203k consultants. These are professionals who have at least three years' experience as a home inspector or general contractor or are a current, state-licensed architect or engineer. They also have to demonstrate their ability to conduct feasibility studies, inspections, architectural reviews, cost estimations, and more, as well as certify their knowledge of HUD's Single-Family Housing policies.
To see options available in your area, just head to HUD's 203k consultant page and enter your city and state.
The bottom line
The 203k program can be a great option if you're looking to rehab a property, but don't expect to go it alone. Regardless of how much experience you have in house flipping, if you use a Standard 203k loan, you'll need a 203k consultant on hand too. Make sure you allot for the fees they come with, and be prepared to work with these HUD-approved project managers throughout your rehab.
And don't forget: 203k loans aren't your only option for financing a flip. If letting someone else take the reins isn't up your alley, there are lots of other loan choices that might be a better fit. For example, there are fix-and-flip loans, hard money lenders, portfolio loans, and more. If you already own other properties, you might also consider a home equity loan or home equity line of credit (HELOC).
The bottom line? You have options. And if you're torn on which one is right, consider talking to a mortgage broker. They can advise you on which financing paths are the best fit for your project, budget, and timeline.
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