Think you have what it takes to take on a renovation project, but don’t have the war chest of money for the repairs? The FHA 203k loan may be the perfect option for you! 203k loans are actually pretty popular in Chicago real estate. Even better, you can use a 203k loan to buy 2-4 properties in Chicago, which is a good way to get your first investment property.
If a property doesn’t meet FHA’s standards (which most foreclosures & other distressed properties don’t), then homebuyers won’t be able to buy the property unless they have a lot of cash saved up. With the 203k loan, the lender will lend you the money to buy the property as well as lend you the money for the repairs, which will in turn give you access to properties you wouldn’t have otherwise.
However, 203k loans tend to be a lot harder than people make it out to be. Below are some things you should look out for when dealing with a 203k loan to buy multi-unit properties.
First, Think About What Repairs You Want to Make
The first think you should think about is what you are looking for in a 2 flat (or any multi-unit property). Each property you look at will be different, so they will need different repairs. If you know exactly what you are looking for, then it will be a lot easier to estimate the number of repairs needed to bring the 2 flat to where you want it to be. Without defining what you want, it is very easy to go over board with repairs, leading to higher repair costs. This can lead to you passing on buildings that could have been a good fit for you. Without a goal in mind, it will be harder for you to find the right building for you.
Finding A 203k Contractor
Now that you have an idea of what you want, you want to start looking for a contractor who can do the repairs. This can be a lot harder than you think, so that’s why I recommend that you start looking for it even before you make an offer on a home. Once you make an offer, you only have 5 business days for the attorney review/inspection period. If you don’t have your contractor lined up, you can risk missing out on the deal.
Now, what makes it so difficult to find a contractor for a 203k deal, you ask. There are a few factors. One, it has to be a licensed contractor. Actually, it has to be a contractor who is licensed and certified with the FHA 203k program. In other words, it can’t just be someone you know who is really handy. Next, you will find that a lot of contractors do not actually like the 203k program. The reason is because the contractors will not be paid upfront, like your average job. They have to actually front the money themselves to start the project before the lender will pay them their first installment.
If you do find a contractor who does deal with 203k loans, you will find out that because of all the factors that I mentioned before, these contractors tend to charge more than the average contractor. Hey, if they have to wait for their money, the final payout needs to be worth it to them, right?
The FHA 203k Consultant
If the estimated repairs to the 2 flat you want are under 35,000, then you have what is called a streamlined FHA 203k loan, and you can avoid this step. If the repairs are over 35,000, then your loan will require a 203k consultant. The 203k consultant is basically a professional who will oversee and guide you through the repair process. They are also there to make sure that everything in the building is up to FHA standard, and that the estimated repairs reflect that. For example, if there is no source of heat in the home (furnace/boiler is missing or damaged), they will not allow you to just update the kitchens & bathrooms. The heating repairs must also be added to the estimated repairs.
The 203k consultant is also there to make sure that the contractor is doing their job, and they are not taking advantage of you, or the 203k program. Some of these repairs can become pretty extensive, not a lot of buyers will know how to properly work their way through a major renovation project. The consultant is there to make sure that once the deal closes, everything goes as smooth as it possibly can.
Appraiser
Once the estimated repairs are given to the lender, the lender will then send an appraiser out to the property. The appraiser’s job is to let the lender know how much the property will sell for. This is to make sure that the lender doesn’t lend out more money then what the property is worth. With a 203k loan, the process is a little different. The appraiser’s job is to let the lender know how much the home will be worth after all the repairs are made. This is a very important distinction, because if all the repairs don’t add enough value to the property, the lender may not go through with the loan, or you may have to adjust the repairs that you with to make.
The FHA 203k loan is a great way to gain access to Chicago 2 flats that you otherwise would not be able to buy. However, don’t think that it is a walk in the park. This loan option may not be for everyone, but if you have the patience for it (because trust me, nothing ever goes perfect with a 203k loan), then this can be a great option to buy multi-unit properties. Any questions or comments, feel free to reach out to me. Thanks and have a great day!