The LIFT our Real Estate Market Needs Right Now:
It’s time to LIFT the moratorium on the Investor FHA 203(k)
On October 29th, 1996 Mortgagee Letter 96-59 was released, placing a moratorium on the FHA 203(k) renovation loan for INVESTORS, and for good cause. Numerous cases of fraud were uncovered where investors were in cahoots with contractors who were in bed with the HUD- approved consultants. Several million dollars in losses were incurred by HUD when the consultants allowed contractors to submit inflated repair bids on dozens of homes that investors were purchasing. Construction draws were approved by the consultants, that were never completed, and millions of dollars fell into the hands of the contractors and investors who disappeared without making any mortgage payments. HUD ended up holding the bag of defaulted mortgages on the same distressed homes they insured. The result was mortgagee letter 96-59 and the moratorium.
The question is: Can we learn from the mistakes of the past and re-introduce the Investor 203(k) to help revitalize our economy? I SAY, YES…. WE MUST…
FHA 203(k) renovation loans were introduced to the market in 1978 by HUD to revitalize the nation’s housing stock. Today, the loan allows any owner-occupant buyer to purchase or refinance any home, one year or older, and get extra money to remodel or repair the home as part of their loan.
You purchase an older home, that requires repairs, for $160,000; the home needs a new roof, a kitchen remodel, 2 bathrooms updated, new windows, doors, paint, carpet and new appliances. Your licensed contractor gives you a bid for $40,000. Add the purchase price plus the repairs and you get $200,000. Through the FHA 203(k) renovation loan program, an approved lender will lend you $200,000 less a 3.5% down payment. The borrower will need to qualify for a base loan amount of $193,000 plus the financed UPMIP (Up-front Mortgage Insurance Premium).
The contractor’s bid is given to the appraiser and the home is appraised “As-Repaired” and FHA will insure the loan up to 110% of the repaired value. So, in the above example, if the repaired appraisal is $181,819 or greater, the lender can fund the loan and FHA will insure it.
Are we going to let the indiscretions of a few Investors 16 years ago get in the way of providing a badly needed financing tool to revitalize our nation’s economy and housing stock?
What lessons can be learned from the mistakes of the past? Having been involved in several hundred successful FHA 203(k) transactions, I’ve seen the good, the bad, and the ugly. If I were in charge of rewriting and re-releasing the 203(k) program for Investors, this is what I would do differently:
- Require a professional Home Inspection on all homes to identify all deficiencies from an “Independent” licensed home inspection company.
- Give the home inspection report to a licensed contractor who submits a bid to repair all health and safety items on all major systems; i.e… roofing, foundation, windows, doors, electrical, plumbing, heating, insulation. Assure that any mold, termite, well, septic or lead-based paint issues are addressed.
- The HUD approved consultant will become a “Plan Reviewer / Inspector”. He/She will review the contractor bid and the inspection report to validate the scope of work and create the post-closing draw report. The plan reviewer will be responsible to take photos of all proposed work and submit the photos with his “Work Write Up.”
- The same HUD approved consultant/plan reviewer will inspect, approve draws, and submit the before and after photos of work completed to the lender for release of the construction draw funds to the contractor.
Please note that technological advances in the building industry’s construction management software and execution of construction funds over the last 15 years will nearly eliminate any chance of fraud.
- Certification of HUD approved consultants, plan reviewers, and contractors participating in the FHA 203(k) must and should be required to take appropriate continuing education courses every 2-4 years to maintain their certification. These classes will keep them up to date on industry construction advances, energy efficient products and tax benefits, inspections procedures, building codes etc…
THERE IS AN URGENT NEED TO REVITALIZE AND INVEST IN OUR COMMUNITIES
According to RealtyTrac, there are nearly 2,000,000 Foreclosures on the market today. A 9/27/2010 Wall Street Journal report estimates shadow inventory between 4 – 5.6 million homes. “Shadow inventory” refers to homes where mortgage holders have defaulted on their mortgage but the lender has not foreclosed yet.
Almost 15 million homeowners were underwater on their mortgage at the end of the first quarter, according to Moody’s Economy.com, and that number is only expected to rise because home prices have yet to stabilize.
Who will purchase all of these homes? Entry level buyers can absorb only so much. Studies say that at the current rate of absorption, it will take 9 years to absorb the current and shadow inventory.
We need Investors! But not the greedy, self-serving investor who is looking to make a quick buck, an investor who puts lipstick on a pig and sells it to an uninformed first-time home buyer who ends up over their head in repairs a year later. We need the investor who wants to make some money, invest in their community and do the right thing. With proper oversight from the lender and the HUD approved consultant/plan reviewer as covered above, we can make a difference in our communities and help put families into clean, safe, functional, energy efficient homes where they can feel good about themselves and their community. We will create jobs for carpenters, electricians, plumbers, and roofers. Window and floor manufacturing plants, carpet mills, and roofing manufactures will be hiring the unemployed.
There are thousands of small time investors who have the desire to purchase distressed properties, fix them up and rent them as investments or resell them for profit. But they have been forced out of the market because they don’t have the resources to pay cash for the property and all of the repairs. Hard money financing is available for 12% – 16% and several points, but these are short-term loans, typically only 6 to 12 months. These loans are risky, because what happens if the home doesn’t sell in that time frame or they are unable to get permanent financing?
At 85% LTV, the investor has some skin in the game which minimizes HUD’s risk. The 203(k) loan has a 10% contingency reserve built into the renovation budget for any surprises that may pop up during the construction phase and the investor can choose to include some mortgage payments in the loan if the scope of work is extensive and the property will not be habitable for 1 to 6 months.
The FHA 203(k) renovation loan for INVESTORS is due for an encore. The economy will give it a standing ovation for the help it will provide to get out of the housing mess we are in. It will speed up the recovery, absorb the distressed homes much faster, reduce unemployment, and revitalize our nation’s communities and housing stock.
Realtors, Contractors, Asset Managers and Mortgage Professionals can get trained and Certified on-line at www.RealEstateEducate.com and become a RLCPro “Renovation Lending Certified Professional”.
Skip Schenker is a Renovation Financing Specialist, Trainer, Public Speaker, Real Estate Broker, NMLS licensed and a retired licensed contractor who has specialized in FHA 203(k) renovation loans since 1994. He has been training realtors since 1997 and has spoken at many national REO conferences. He produces a weekly video show called the HOT… Dog of the Week found at www.HotDogoftheWeek.com , where he highlights a distressed property and walks thru it with a home inspector, contractor or Interior Designer and they share remodeling ideas to turn it from a “Dog” into a “Hot” property; these videos are found on YouTube and Facebook. He also has a blog site www.fundmyremodel.com and two on-line radio shows, www.Renovation-Radio.com & www.REO-Radio.com. Skip is a cancer survivor who is committed to helping families live quality lives in clean, safe, comfortable homes.