This is an "all to common" statement that our buyers tell us. What is wrong with this picture?
The home needs work, they have cash but they want to control the cash and they can't get any kind of loan if they don't do some work on the home... let's do the bare minimum then we can use our own money to do the additional things we want to do to the home. NOT necessarily a good thing.
If the work the owner wants to do delays the FHA 203k work... the completion of the project for the contractor will be delayed therefore his "10% hold back" will be delayed, and for what? I would much rather see all the work they want to do put into the project now so they can enjoy the home and become a slave to the home repairs.
One client recently stated that they did the bare minimum and they wish now that they had gone in an fixed it up from the "get go" so they could have enjoyed it... oh, purchase price $300,000+/- just appraised at over $700,000 as they got out of the 203k loan and the PMI just two years later.
Hidden benefit of putting your cash in up front so the work gets done asap... maybe a larger down payment might let you get a "HomeStyle Renovation" loan and get rid of your PMI altogether. The FannieMae product that works just like the FHA 203k loan program and has no PMI. Loan limits are a bit lower and they only do single family homes.
If you are a Realtor and your client is thinking about doing this... remember that if they fix the home more completely now, and relist with you in three years... you will be selling a much nicer home than they purchased.
-Mike Young, 203k Team Leader