203K≠REO - Renovation Loans NOT Yet Ready

Almost all for sale REO (Real Estate Owned, Bank Owned) houses are run down. That’s why banks sell them cheap. The problem is that financed buyers can't buy houses with holes in the walls, broken windows, missing bathrooms, filthy carpets, etc. Or buyers don’t have the money for repairs.

That’s why the 203K is the perfect answer for the REO. The 203K loan is really two loans in one, a loan to buy the house, and a loan for repairs.

Qualifications for the 203K: 1) a) the buyer must qualify for the buying amount for the house AND b) renovating amount; and 2) the house must appraise for the entire amount, a + b. (There are other conditions/requirements.)

There are two types of 203K loans. The light, the streamline 203K, $35,000 or less, is usually for cosmetic work, minor stuff. The 203K heavy, $35,000 plus, is for major construction work... good for buying contractor’s specials. (Amounts vary per lenders so ask.)

Ideally, most borrowers should use the light 203K.

Sounds good, right? You’re ready to dial 203K-4-REO.

So why isn’t everybody using 203Ks if they’re so great? Because the lender requires:
1. A pest/termite inspection and a home inspection. If there are other inspections, the bank wants to see those too. These inspections are usual. Cost, $600.
2. A bid from a licensed general contractor (GC) for the repairs. The GC must show his contractor’s license, driver’s license, SSN, good credit score, and three written recommendations. It may take two or three GCs before finding one with good credit.
3. An appraisal which, again, must cover the projected value. Cost, $500.
4. A HUD consultant review. The consultant will review all reports and job bids. The consultant can require other improvements. Cost, $750.

Then it goes into, yeah, underwriting, the person/department that makes the actual loan. (No the loan agent doesn’t make the loan.)

Here are my two experiences with 203Ks:
1. We got the pest/termite report; did the home inspection; got a licensed GC bid, $20,000. Purchase price was $160,000. Buyer was OK for $180,000.
The HUD consultant said, “This house is going to need more than $20,000 to fix.” He walked into the house, and pointed out, “There’s mold here. I'm sensitive to mold, and am already getting a reaction. I can tell the floors need repairs. That crack in the ceiling is from a roof leak; this house is going to need a new roof with a two-year certification. You’re going to need new windows.” His estimate came out to $40,000.

By the way, we’re almost two months into this deal. The listing agent is asking me, “When are we closing?”
$200,000 was too much for the buyer. Buyer said, “That’s it. I guess I’ll continue to rent.”

2. On another purchase, we do the pest and home inspection. It appraised. HUD consultant said it was good. Two months and $2,000 later we’re OKd for the $335,000 loan. So what kills the deal? The underwriter rejects the buyer and denies the loan due to sticker shock, lack of assets, late payments, and insufficient lines of credit. We found this out at the end! The lender had additional “layer requirements” for 203Ks, whatever that means.

We had to back out. The loan agent couldn’t believe the severity of the underwriter/lender. Buyer said, “Let’s find another house; no 203K loan.”

Both times: disappointment. I admit, my two stories don’t tell the whole truth, but after losing one buyer, four months, and God knows how much money, how would you feel?

Some swear that 203Ks work. I’m sure some succeed. Let me ask you, of all the lenders that you know, how many are doing 203Ks?…only a handful right? Why is that? The majority of purchases are not being done with 203Ks. Why do you think that is? In the San Francisco-Oakland area there were only 219 purchases with 203Ks last year.

OK, I still think that 203Ks pair up with REOs. Suggestions?
1. Reduce the number of people involved on the loan side.
2. Eliminate unnecessary loan requirements.
3. The loan agent should view the property to see if the loan is even doable.
4. The loan agent should tell borrowers these are difficult loans.