Home buying and renovating with the FHA 203(k) loan

Nicknamed a “rehab loan,” the Federal Housing Administration (FHA)203(k) program is a potential solution for homebuyers who may be considering a distressed property. Unlike the traditional home buying process in which your buyer would need to secure multiple funds — financing to purchase the home, additional funds to do repair work, and a permanent mortgage when the work is completed — the FHA 203(k) allows the potential buyer to borrow funds for home repair work and home purchase in a single loan.

The FHA 203(k) program offers a long-term fixed or adjustable rate. The mortgage amount is determined by the cost of repair work needed plus the purchase price, less the required down payment (3.5%) as long as the repair plus purchase is less than the projected value of the property once renovation work is completed.

What’s required

Like any loan, there are some requirements that a property must meet in order to be eligible. First, it must be an existing one to four unit family dwelling. Luxury improvements are not eligible. However, an FHA 203(k) loan can be used to convert a multi-family dwelling to a single family home and vice versa; for grading and drainage correction; and for improvements for accessibility. The loan can also be used to cover the expenses for painting, room additions, and decks.

Eligibility also requires addressing health and safety issues and meeting building codes. These issues may include abating lead paint and correcting electrical problems and plumbing concerns. All rehabilitation construction and/or additions financed with an FHA 203(k) loan also include cost effective energy conservation standards consisting of items like caulking or sealing all openings, adequately ventilating attics and crawl spaces, and weather-stripping doors and windows.

The loan agreement requires that repairs and renovations start within 30 days of execution of the agreement and that rehabilitation work be finished within six months of closing.

The FHA 203(k) program provides a great opportunity for homebuyers looking to purchase a distressed property.

Sources:
Rehab a Home with HUD’s 203(k) [online]. HUD.GOV. Available from Internet: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou

REOs have been a major part of our market for several years now. Despite their prevalence, the challenges on the buyer side can still throw everyone for a loop. Based on a survey of agents, the most-often-mentioned advice was the importance of educating buyers about the REO process before you begin driving them around town.

Here are some topics and terms you’ll want to familiarize yourself with:

Highest and Best.
Negotiating with an asset manager is different than negotiating with a traditional seller. If an REO property seems to be a steal, it is more likely to receive multiple offers. Counter offers and demands for “highest and best” are par for the course. Asset managers want to show they got the most money they could for the property. In consultation with you, buyers must decide what the house is worth to them and what negotiation strategy best suits their personality.
Verbal Response.
Once an offer is made, the counter offers for REOs are generally verbal—which means that another buyer can swoop in with a better offer anytime. Even once “agreement” is reached, there can be a gap of days or weeks until a contract is actually signed. It is important for the Buyer to understand that until both parties have signed the contract, there is no real deal.
Timelines.
And yet, just because you don’t have the signed contract does not mean that the clock hasn’t started ticking on critical time periods. Be sure you understand the terms of the addendum indicating when exactly timelines such as the inspection period begin. “Check. Don’t just believe what you hear,” warns Mindy Slanaker, an agent with HomeSmart in Tucson.
REO Addendum.
AAR’s standard contracts are written to balance the interests of buyers and sellers. An REO addendum shifts the balance firmly in favor of the seller. For example, an addendum may require the buyer to pay a per-diem for each day of delay on the closing regardless of who’s at fault.
While much of the language is non-negotiable, it is extremely important that the buyer understand the addendum. This is why it is recommended that a Buyer consult a lawyer. Of course, you’ll still have to get out your eyeglasses to read the fine print because important information (such as when escrow opens or when the inspection period begins) is included in there.

REO properties are typically sold “as is.” This means both that it is unlikely repairs will be made and that the bank is trying to protect itself against disclosure issues. The bank’s contract documents “purport to disclaim all warranties and representations in an effort to limit potential liability for nondisclosure,” as attorney Rick Mack wrote in a recent article on the enforceability of these as-is clauses. Still, a seller, even in an REO transaction, has a legal obligation to disclose known defects.
SPDS.
Most REO sellers will not provide a Seller’s Property Disclosure Statement (SPDS). AAR General Counsel Michelle Lind recommends that a buyer’s broker should nonetheless provide the buyer with a blank SPDS. “The buyer can and should utilize a blank SPDS as a checklist in conducting the desired inspections and investigations,” says Lind in an April 2009 article about REOs.
Due Diligence.
The biggest thing I stress is the inspection period, If you don’t like what you see, do your inspection, do your due diligence and consider all your options.
For Kent Simpson with Tierra Antigua in Tucson, doing his due diligence as an agent included double-checking that all zoning and setbacks were properly adhered to. He found a newly constructed carport that was right on the property line. “It saved my buyer about $7,000 in the cost of tearing it down—not including possibly city zoning violation fines,” he reports.
Some buyers balk at paying for a home inspection when the property is offered as is. But as Ziller tells her clients, “Even if they won’t fix anything, you still have to know what you’re buying.” In fact, in an as-is situation with minimal disclosures, a thorough home inspection may be even more important than usual. “With REOs, it’s a buyer beware world,” says Simpson. “A bargain on the sticker price doesn’t mean it’s a bargain under the hood.”
If you recommend home inspectors, make sure they are licensed and insured. If the buyers refuse an inspection, have them sign a letter stating that you have informed them of the importance of an inspection, and they have elected against it.
Utilities.
Getting utilities turned on for inspection can be a challenge. The contract obligates the seller to have the utilities on for inspections, but occasionally the addendum may change that. Different banks handle the issue differently. At one property, a listing agent may refuse to be involved in the process. At another, a bank may insist on coordinating the de-winterization itself to ensure it is done properly. At a third, an inspector may arrive to find that the utilities promised to be on still aren’t.
Recently, Dean Ouellette, a Chandler agent with Thompson’s Realty, posted on his Facebook page asking for ideas about how to handle the issue of inspectors finding utilities off despite promises to the contrary. Shar Rundio, also with Thompson’s in Gilbert, suggested calling the utility company to verify service before the inspector visits. Matthew Pellerin with Realty Executives in Phoenix has instructed his team of buyer agents to make a trip out the day before to verify utilities themselves. And Kerry Melcher with Melcher Agency Real Estate in Phoenix suggested adding a clause in the contract stating the inspection period begins “upon verification (written) that all of the utilities are on and the property is ready for an inspection.” (Behold the power of social media!)
Unexpected Expenses.
Inspections can also lead to fees for which the buyer isn’t prepared. Some banks require the buyer to pay to have the home de-winterized and re-winterized. Depending on where you do business, that may not be the only utilities expense. “If electricity has been off for more than six months, a pre-inspection has to be done by Sahuarita to determine if the house is safe enough to have the utilities turned on,” reports Slanaker. “That’s a $40 fee right there.”
No agent wants to see their buyers hit with fee after unexpected fee. You may warn them about HOA doc prep fees and start-up fees but forget to mention that they may need to re-key the house after closing. It’s helpful to mention some of the standard fees that will arise, but you should also prepare the buyer for surprises.
Title Issues.
REO properties have changed hands recently under what can be acrimonious circumstances, so it is especially important to double check title work. “There are a lot of things that title can find out if they’re doing their job,” says Van Welborn with HomeSmart in Glendale.
Ziller reports that she has found many title mistakes. In one instance, she looked up the owner of record and saw that it had not been updated. The listing agent assured her it would be handled, but when it came time to close, it was still incorrect and held up the deal.
And some issues aren’t discovered until after the home has closed. For that reason, Simpson recommends that buyers increase their title insurance coverage. “With all of the problems we’ve seen in the foreclosure process, paying a little bit extra now can save a headache later on,” he says.
Late Closings.
An REO transaction can easily hit a snag on its way to closing. Talk with your lender about allowing room for a late closing when locking in the loan. No buyer wants to expend additional dollars or risk losing a good rate when re-locking the loan. For the same reason, you may want to schedule the move only after the final HUD-1 is approved.

In each transaction you’ll find new wrinkles based on the neighborhood or lender. They’ll help prepare you for the next time you fall in love with is lender-owned listing. And remember that even while you may have adjusted to the “new normal” of real estate in 2011, your still need to be prepared for the REO rollercoaster before you strap on that seatbelt.

Amazing deals in the Optima at 24th St Camelback…showed some Buyers a number of them and quite a value relative to their original pricing, however, the HOA can be a bit pricey with more and more foreclosures or Short Sales not contributing to the HOA.