If you have ever heard of renovation work then you may have heard about contractors taking money and never starting or finishing the project. With a renovation using a renovation loan there is no work performed until the loan closes. There is no money paid upfront as a material or construction deposit. Construction payments are only made after work has been completed and inspected for workmanship by the renovation consultant.
This setup benefits not only the homeowner, it benefits the contractor. Many a contractor have been stung by a unscrupulous client who had work done but never gotten paid. A lien can be placed on the property, but the contractor is still out of money paid to the subcontractor, supplier, and no payment to them for their overhead cost. A renovation loan places funds in escrow which is a reserved fund that guarantees that money is available for timely payment after work is completed.
No liens, no upset subcontractors or suppliers. Work is performed. Money is there for payment, payments are issued. The escrow payer often performs title searches during and at the end of the project to ensure a clean title free of liens for your peace of mind.
Do I need a Renovation Consultant?
Contact us to assist with your renovation project (816)565-1991
If you are seeking to do renovations or additions with a FHA 203k loan or Fannie Mae HomeStyle loan you must work closely with a renovation consultant who will coordinate the project and process required project loan documents throughout the project. The consultant monitors construction, process payments and ensures project completion. Both homebuyers and current homeowners can benefit from either renovation loan.
If the property being considered for purchase has qualifying repairs and the scope of the work to be done exceeds the 203k streamline guidelines then the project must go through the full renovation steps described below and requires a renovation consultant.
The role of the 203k Consultant is vital to the success of a FHA full 203k loan. The consultant is responsible for the onsite visit and the HUD work write up and is responsible for staying on during the project to facilitate draws and inspections. I like to think of this person as your own project manager and it adds a nice layer of comfort and protection to the project. It is very important that you and your consultant stay in communication. Here is what we do for you each step of the way:
Initial Site Visit
When your mortgage professional, real estate agent or you contact us to schedule an appointment we are reserving time to review the property, understand the work to be performed, and evaluate for potential issues that may derail, delay or cause cost overruns.
Upon visiting the site, the renovation consultant will perform a thorough examination of the property and provides with an assessment about the project’s feasibility under the 203k loan requirements.
Property Site Visit
- 203k HUD Consultant meets with the borrower and contractor (if you have one at this point) at the property
- Explains the renovation process and answers questions
- A walk through of the property to evaluate the property condition according to the FHA’s Minimum Housing Standards
- Listens to the borrower’s desired renovations and improvements
- Suggest improvements that are customary to the industry
- Looks for and identifies suggested or mandatory repairs to make the home safe and sound upon project completion
- Discusses any potential risks to a successful renovation based on the condition of the property
- Takes measurements, counts quantities, and collects data on property
- If the home has not been inspected for termites, inspect for an additional fee (highly encouraged)
- If the home has not been inspected, perform a home inspection for an additional fee (highly encouraged)
Detailed Work Write-up, Cost Estimates & Loan Closing Package
Based on the initial site visit and inputs from the buyer regarding their renovation plans, the renovation consultant will prepare a concise work write-up document regarding the project’s scope and specifications. Provided architectural exhibits along with a detailed cost breakdown for each of the repair tasks will also be included. Additionally, the renovation consultant will also prepare lender packages and contractor bid packages that contain everything mentioned within the project scope. Finally, draw request forms based on the work plan to be followed will be prepared.
Once the detailed work write-up is completed and signed by all, a copy of the completed package with all the required documents is submitted to the lender, contractor and the borrower.
Post Site Visit
- Contacts or follow-up with the contractor to explain the process, answer questions and revise the contractor’s bid
- Research municipal building permit requirements and fees
- Estimate each repair line item
- Draft an independent renovation cost estimate
- Review provided contractor bids for appropriateness
- Determine if the project is feasible given the condition, required work and loan approval amount
- Preparation of contractor bid packages
- Facilitates contractor bidding, if requested for an additional fee
- Coordinate with general contractor to prepare detailed labor, materials and quantity construction estimates within HUD specified cost categories for the loan to close
- Prepare the detailed work write up
- Get the document signed by all parties
- Deliver the lender package and work write up to the loan officer or underwriter, contractor and borrower
- Follow up and resolves any issues directly with the underwriter to ensure the loan closes on time
Choosing a Contractor
The borrower will then invite bids from contractors to complete the work listed in the consultant write-up. Before you proceed with the contractor bid process, make sure your 203k lender agrees to it. Most active 203k lenders may have pre-screened list of eligible contractors and they may stipulate that the work is done through one of them. If not, they may have a set of requirements for a contractor handling the rehab work. It is highly advisable to work with a contractor who is aware of the 203k guidelines and understand the steps involved in it. If you are going to be working with a new contractor who has no prior experience, make them understand the draw process and the work completion schedule as determined by the 203k consultant in the write-up package.
Many contractors take issue with no money upfront. Also, each draw payment has a 10% holdback. The holdback is paid to the contractor at the end of the project to ensure all work is completed properly and no liens have been placed on the property throughout the duration of the project.
All contractors are required to be licensed, insured and in most cases obtained EPA Lead Safe certification. The Lead Safe certification is required where paint on a building older than 1978 is being disturbed.
Borrower’s responsibility Contractor Selection
- The Borrower selects a contractor. Your lender may and will have contractor qualification criteria. Some lenders maintain a list of contractors that have met their qualification criteria. Discuss contractor selection with your lender to learn about their contractor requirements. If you’re considering a contractor which has not yet been approved by your lender or has never done an FHA 203k project, it is important that they are informed early on about the FHA 203k concept as it applies to contractors.
- The general contractor is required to maintain $1 million in general liability insurance coverage, have 3 references within the last 12 months, show that they are in good standing with their creditors and can provide a detailed bid broken down into labor and materials.
Once a contractor is selected and the loan conditions are satisfied, your 203k lender will schedule a closing that is convenient for you and the seller. After all the loan documentation has been signed, funds for repair work will be escrowed. From this point onward, the renovation work can commence.
Draw Request Inspections
The 1st draw will processed once the consultant determines that all the necessary permits have been issued from the local authorities. Depending on the completion of the work identified in write-up as per determined schedule, the consultant will make subsequent inspection visits and issues the 2nd and 3rd draw amounts.
After the 4th draw request, a punch list containing any unfinished, outstanding tasks is handed down by the 203k consultant to the contractor. The 5th draw, held as a retainage is issued after the final inspection. At this point, the project will be successfully completed with no unfinished tasks. A 203k lien release form that absolves both the borrower and the lender is entered between the buyer and the contractor. The contractor is required to provide a 12 month warranty on the completed work.
- Repair funds are placed in escrow
- Consultant informs contractor of Notice to Proceed
- Remodeling begins with an anticipated completion date of 180 days from the start date but of course earlier completion is always encouraged
- Contractor completes no more than 30 days of work and requests a draw
- 1st Draw – Consultant insures permits were issued.
- Consultant Performs Draw Request Inspections
- Consultant recommends adjustments or approval to the borrower
- Prepares draw request documents and sends for signatures
- 2nd and 3rd Draw – Draw request inspections are performed as work progresses
- 4th Draw – A punch list is established
- 5th Draw – The project is closed out and warranties and lien releases collected
The above tasks involve an active role of a 203k consultant. That is why we are here to assist. Give us a call today (816)565-1991
Renovation Consultant Fees
The exact fee to be paid depends on the cost of the proposed repair work. The FHA HUD Office determines the consultant general fee schedule. Our actual fees may vary from the amounts published by HUD based on additional and associated tasks. The HUD established fee includes visiting the property and providing all the necessary exhibits along with a complete work write-up.
Contact us at (816)565-1991 for actual fees.
The primary responsibility of the 203k HUD Consultant is to insure HUD’s minimum property standards are met. That doesn’t mean that the consultant aids in other ways. The consultant also ensures the smooth completion of the project and that the work is completed properly before payments are issues, the contractor is paid timely and the borrow is satisfied with the process.
It seems like the work write up is an important document package. It is. In the work write up the consultant cover your required repairs that will need to be done to your property. Also the consultant will make any recommendations for work that should be done. Then finally it will include desired work that the you would like to include.
The report will also stipulate if the home is habitable or not, the number of draws that will be allowed and the amount of contingency that will be required. The maximum number of draws is 5. If the home is not habitable you will have an option to finance up to 3 mortgage payments in to the repair escrow amount. The number of months is determined by the scope of the work and how quickly the home will become habitable.
Finally, there is a contingency fund that is used for unforeseen site conditions. All renovation loans require a contingency fund of 10% – 20% of the base bid amount based on the consultant’s discretion. The scope, property condition and complexity of the work usually dictates the percentage of the contingency. Usually when the power is off, foundation work is involved or anything structural the contingency is usually set at 20%.