The 203(k) Contractor
Q/A: Best Time to Hire a 203(k) Contractor
Hi all! I have a question for contractors… As a soon to be 203K buyer, I’m wondering about the process of making an offer without yet knowing the cost of repairs or if they’ll be in my budget.
Do you give estimates at this stage? Do you charge for estimates? Is it typical to be contacted multiple times by the same buyer through their home searching process?
Thanks in advance. – Abigail
Hi Abigail – – that’s an excellent question!
When considering working with the 203(k) loan, if you haven’t established a budget and created a specification of repairs, it’s not the right time to speak with a contractor.
You should attempt to know more about the following before you consider having a contractor give you a cost estimate:
- (potential) value of the finished product/project
- minimum repairs that will be mandated by FHA
- loan qualification(s)
One of the main reasons for waiting is simply this: by the time you hire a contractor – you want to be prepared to give ALL contractors the exact same info.
Gary Smith – Professional 203(k) Consultant
Never call a contractor and ask them to price “something”.
You are in charge of the project. For the best result of your efforts you want to”tell” them what you want priced in a fairly detailed breakdown. Collecting more information will allow you to get at least 3 contractors to price the work – – – at that point you have the options to compare their price, personality, work history, etc.
Because working with the 203(k) Loan is a team approach – you’ll want to contact each team member.
Contact a lender now. Remember – think of FHA as an insurance company. The mortgagee will actually qualify you and lend you the money – FHA will insure the loan. It’s important to speak with a lender them about your idea very early in the process. Some lenders/mortgagees don’t offer the K Loan – here’s a list: https://www.hud.gov/program…/housing/sfh/lender/lenderlist
Ask a real estate professional for a “broker opinion” on value (ask about the “repaired value vs the as is value”). The broker will consider similar homes in the area and help you determine if the finished project will be “overbuilt” for the area you’re considering.
Contact and hire a 203(k) Consultant.
He/She should visit the job and speak with you about the job’s feasibility. You will want to share the broker opinion with the consultant to help them obtain a good idea about the home’s value.
Based on your remodeling ideas and plans the consultant should help you detail potential repairs. Because the consultant understands Minimum Property Requirements you and the contractor may not consider, the consultant’s repair list will help you understand cost and fit the cost into an overall idea about the value of the finished project.
The consultant will be able to help you determine if the project is feasible and should offer you a detailed list of repair items and specifications.
It’s now time to hire a contractor.
Finally – it’s a good idea to begin setting up a budget for the entire project. Include the cost to hire the right professional at the right time so you don’t back-track over steps you’ve already taken.
You’re ready to create a clean path to a successful remodel.
Reach out to us in our Facebook Group with your progress and let us help guide you in the right direction.
Answering The Same Questions About Lead Based Paint – LBP
I can’t believe that 10 years after it went into effect many underwriters still don’t get it.
The following excerpt is copied from a 203(k) consultant’s work write up describing work that must be required of the borrower or homeowner during a renovation:
“RRP: Provide all required containment/cleanup/disposal by a licensed Paint Stabilization professional for Lead Based Paint – The building appears to be built before 1978 – Provide completed EPA required Containment and Cleanup Manifest”
From Our Sample Report Describing LBP Requirement
Regarding the licensing (Renovators), contractors working in buildings built before 1978 have been required to be licensed by the EPA since April 2010. If the contractor is not licensed then he needs to use someone who does have a license within his company.
Regarding the Manifest, that’s the document the contractor is required by law to fill out to chronicle that he did the proper containment and cleanup after the work was completed.
The documents must be kept in the place of business pending any EPA audit of his past projects. Know that the item is not a “requirement” of any lender.
Recently on television, Chip and Joanna Gaines were fined $40,000 for not filling out the paperwork for all the jobs they finished. Also, unless the house is sold by HUD there is no credit to the borrower.
As I mentioned above, the law requires containment and cleanup of work that may involve painted surfaces presumed to contain LBP, not identification of such contaminants.
In addition, a general contractor must have at least 1 licensed individual responsible for the entire project. If the license is issued to an entity, the entity will become the responsible party. In such cases, that entity may collect RRP licenses from the various subcontractors to keep on record.
It’s important your report outline only work described by EPA as “Containment & Cleanup” and in no way refer to “Abatement”, which is the removal of such substances by federally licensed individuals.
Contact me for 203(k) Consultant Training.
HUD Consultants & Risk Management
The Exit Draw – A Case Study: Exit Draws After a Fire
In addition to the contractors termination, are risky by themselves however there’s always additional levels of risk that face consultants that must be considered. This condition can also apply to a contractor termination for any other reason.
It’s notable that contractors of record are usually replaced after buildings suffer substantial damage by weather or fire for the following reasons that may include but not limited to: insurance companies have designated contractors to perform this work for less money; they generally pay higher rates for the work allowing the borrower to purchase additional items; the insurance proceeds are generally used 1st with lender remaining funds going to pay down the principal balance; in some instances the contractor is not qualified to restore the property.
The following is such a case where the contractor is seeking payment for materials stored on site damaged by fire. This is also an Exit Draw so there’s sure to be some drama or disagreement on signing the final documents to close out the loan. I have already spent considerable time going back and forth with the parties including the lender. It’s my belief that staying engaged, rather than pushing it upstream to the lender, will reduce my risk in the future.
Hi XXXXX, Thanks for contacting me.
After further review of my Exit Draw inspection notes and the material invoice provided to me for this purpose, I must deny your request for Sheet Metal materials damaged by the fire stored on site from your loan proceeds for the following reasons:
- The materials were not previously paid for by the lender as a Material Draw, therefore not qualifying as a Change Order for overruns;
- The subject materials were reported as “removed by others” employed or authorized by you;
- The materials were never installed, making them a part of the building, although not necessarily a qualifier;
- The invoice provided for payment, is from a third party not identified on your loan;
- The material invoice does not identify either you or your property;
- The material invoice submitted does not identify your contractor as recipient of the materials;
- The material invoice submitted does not identify your contractor as end purchaser of the material in question;
- In the case of fire, your insurance company would more than likely consider the materials as your contents;
- I cannot accept random photos taken by others to support this, or any other request for payment that were not previously authorized to be taken for the purpose of payment from your loan;
- The contractor has not provided evidence to corroborate a claim for mechanic’s lien in the State of Illinois;
In conclusion, I have prepared and sent your Exit Draw to be Docusigned with no request for payment along with the required documents to close out the project with this contractor. Should my assessment be disputed, please contact your lender for further assistance in this matter.
When reviewing invoices and purchase orders for any reason, make yourself a checklist similar to the one above to qualify the documents. As always my “risk management” may seem over the top but just like this borrower who had good insurance…there’s never too much when things start “breaking bad”
Dominic J. Valenti is a professional HUD Consultant in Chicago, IL #A0799
203kconsultingpros@gmail.com