Tuesday, June 30, 2015

Choosing the Right Contractor for Your 203k Project

This is getting harder and harder to find good contractors who will charge a "fair price" for your renovation project. I actually hate to get that call from a lender who is doing a streamlined k loan and wants to get a list of contractors from us for that project because we don't typically work that way.

Contractors, like any other trade contractors, have a tendancy to increase their prices when times are good and get competitive when times are not so good. This is not a bad thing and by the end of the year most of the contractors we know are flush again, waiting for the winter months when they get competitive again. It is just the way things are. Please don't misunderstand this isn't necessarily a bad thing, it is just the reality of it all.

Here is what the results are however and that is a sad reality for the owner, borrower, buyer, etc when a project comes available for bid.

Streamlined k project - This is where everyone else tells you that the maximum amount is $35,000... it's not but that is what the guideline actually says. Your contractor bids the job at $34,500, the lender says the loan is dead or it must be a Standard 203k loan because the contractor failed to realize this particular lender REQUIRES a 10% contingency reserve to be included in the loan dropping the actual work to about $32,000. Remember this loan as the one with NO structural work.

NOTE: once this happens the HUD Guideline says this loan has tripped the check valve (my words not HUD's) and is now a Standard 203k. This can also happen if the appraiser sees repairs that should have been called out and weren't... oops, another tripped check valve, it is now a Standard 203k.

If your lender does both Streamlined k and Standard 203k loans this isn't a problem but if your lender only does streamlined loans you will hear the new story line like "there is too much work for the 203k so you need to find another home to purchase" or "we need to get the cost of the work down.

Standard 203k project - This type loan has no $35,000 limitation. In fact the loan in most of the areas I work has a maximum loan amount of $729,750 so the limit is the purchase price + renovation costs not to exceed the $729,750 limit. Yes, of course the home must appraise for the loan as well as the borrower must qualify for the higher amount.

What does the consultant do for their fee? 

We just completed a project where we put the bid together along with the scope of work and bid the job for the client. This is what we do for our fee. Then the project went out to bid. Contractor 1 bid the job at $85,000 in construction costs, permits, fees, etc. On the surface it is pretty straight forward. Oh, almost forgot, my bid was about $59,000 including costs and fees, permits etc. Why such a large difference? Two possible answers, one is that my bid was not very good. We aren't perfect and are not above making a mistake from time to time, or, two - the contractor was very busy and used this opportunity to make up for a low bid on the last job.

Second bid came in at $60,000 from a contractor that we knew and recommend all the time. What does a consultant do for their fee - simply let the borrower know what a "fair price" might be for their project then helping them find a contractor who isn't so busy or one that is not trying to recover from a bad season.

What can you do about high contractor bids? 

Shop more, this is time consuming but certainly the right thing to do if you are way high. If you are only a little higher than you need to be there are other solutions. Talk to the contractor and see if they can help meet the necessary requirements. Remember that they are just people with a skill and being nice guys we all want to see the deal progress. Sometimes a contractor will step up and work with you to make it happen. This is clearly the fastest solution. Or, you could contact your "consultant" and get a few names.

Back to the original question - When a lender asks me for a list of contractors it just isnt' the right question... they should be asking for the name of a few contractors who are hungry right now. Again, we like to promote the contractors that we deal with on a regular or semi regular basis as we believe them to be the best in the business. This doesn't mean that we know them all and we take on new contractor all the time. If you have a favorite contractor and want them to be added to our list please have them contact us. We are located in every area of CA and most other states.

To learn more about the FHA 203k loan program go to www.203kOnLine.com. To contact us for a consultation please go to www.my203kconsultant.com and "order a consultation".