In my job as a Renovation Loan Officer I speak with clients that may be deciding between a rehab property to purchase or a totally finished property. One of the concerns expressed to me is the lack of previous experience working with contractors or managing a home rehab project. This is certainly a legitimate concern. After all not everyone is really into rehabbing a home. Some clients just do not feel there is time or just prefer to walk into a move-in ready home. In asking further questions I do also learn there is the fear that the project will go badly or the costs will run over budget or it’s not possible to monitor what is being done and so forth.
I thought it might be helpful for those that have similar concerns to write about how there is a layer of assistance and oversight for each rehab loan, whether a 203k or HomeStyle. The oversight involves the role of the HUD 203K Consultant and a similar role exists in a conventional HomeStyle renovation mortgage.
The HUD Consultant is there from start to finish in the financed rehab process. Below I wanted to highlight the tasks the HUD Consultant performs. The Consultant is usually assigned by the lender approving the mortgage on the rehab property being purchased or refinanced. While not required for a 203K Limited rehab loan I highly recommend having the Consultant involved anyway if this is your first rehab project or it involves complex systems like HVAC, electric, plumbing, etc.
The Consultant will sometimes be a licensed Home Inspector also or even a licensed General Contractor. But the Consultant can only perform one role for a client in 203k or HomeStyle lending. That role is to be the Consultant. Below are tasks the Consultant will perform which can make the rehab process flow as expected and provide needed oversight on the rehab project. In this way the homeowner or Buyer does not need rehab project experience to use these loans to renovate a property effectively.
- The Consultant does a kind of “construction inspection” of the property for the Buyer prior to the purchase. This involves reviewing any code violations, checking for required health, safety, sanitation or security issues in the property that must be remediated as part of the rehab. Also the Consultant will take input from the Buyer on their desired repairs or updates planned for the home. Recently I was with my Consultant at a home he was reviewing for a 203K Buyer client. He found peeling paint, exposed old cloth wrapped wiring, water damage and a roof that has to be replaced. These are things the client or his realtor may not have recognized as issues that must be addressed. Additionally the Consultant may check with the local Building Dept. to inquire as to what must be done during the rehab to bring the property up to present building codes that may not be anticipated. Or even to learn if prior rehab work must be redone or removed.
- After visiting the property the Consultant will prepare a Scope of Repairs report document commonly referred to as an SOR. This document will list each rehab task in a defined format breaking out labor and material costs within a potential of 35 construction categories. These can range from Masonry to Doors to Plumbing to Roof to Cleanup, etc. The Consultant uses a database of expected labor & material costs authorized by HUD to produce the report which is a projection of tasks and costs.
- The SOR will list a repair “Level” next to each task. The levels are Mandatory, Recommended or Desired. Examples of a Mandatory repair would be peeling paint, a hole in a wall, a broken window, missing kitchen sink or a roof with no life left to it. A Recommended repair might be a new, more secure entry door. A Desired repair might be to paint a new door to match existing doors or add wire shelving to a closet.
- The SOR will also contain a kind of summary page called “Recap Subtotals”. This page has a separate dollar total for each of the 35 construction categories and the final total of all of them at the bottom. There will also be a box called “Allowable Fees”. This box has the total dollars of work with the addition of Draw Fees, Permit Fees, Architectural Fees, Extra Unit Fees ( for multi-unit properties), Work Write Up Fee and Contingency Reserve ( 10% to 20% of the rehab budget added in as an emergency fund for potential cost overruns should any occur). Finally all these are added together to show a dollar “Grand Total”.
- The Consultant will also prepare a similar document called a “Bid on Repairs” or BOR. This document is just the same as an SOR except dollar estimates for labor & materials for each task are left out. The purpose of this BOR document is so a client can shop for a Contractor by sending out the BOR as it lists all tasks that are to be planned in the rehab and the Contractor can fill in what is to be charged. It is a concise way of allowing a Contractor to learn what is to be done in a format that is specific.
- The Consultant will help the client sort through Contractor bids and find the one that is most appropriate and realistic in terms of charges for all tasks on the BOR. The SOR will be finalized when a Contractor is selected and handed off to an Appraiser to value the property for what it will be worth when all work in the SOR is completed.
- The Consultant will be in charge of visiting the property each time the Contractor wants to be paid for work completed out of the rehab funds borrowed in 203K or HomeStyle. This is called a “Draw Inspection”. It is the Consultants role to inspect the work done for quality, completeness, adherence to building codes and to the overall plan (SOR). In this way the Consultant functions as “eyes on the project” for both the home owner and the lender. Often clients will be present for a Draw Inspection with the Consultant and Contractor to be sure work is executed according the plan in the SOR.
- Should it be necessary or desired by the client during the course of the rehab project to alter the work planned in the SOR or change it the Consultant will review the changes to be sure all Mandatory items are still addressed. This process is handled by mechanism of paperwork called a “Change Order”. The Consultant, client and Contractor will each sign the Change Order to authorize the change in plan.
- Once all work is completed the Consultant will visit the property for a final Draw Inspection to authorize pay out of the remaining funds to the Contractor and the client will sign off on the completion of the project.
With the help of the HUD Consultant the process of managing a rehab project becomes less of a task for the homeowner to handle. The Consultant is there to guide and advise the client on what to do, how to do it, validate who is doing it knows what they are doing and stay with the project to a successful result.
I always say the 203k or HomeStyle loan may let the homeowner be their own Builder or Developer in a way since the HUD Consultant brings the construction experience the homeowner may lack. I’m a big fan of buying and rehabbing property with these loans. With the HUD Consultant a Buyer or homeowner doesn’t have to worry about being a construction expert.
My advice is always buy the worst property in the best area and rehab!
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!