Renovation Feasibility Study’s

Renovation Feasibility Study’s

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As an FHA 203k Construction Consultant, one of our responsibilities is to perform a Feasibility Study on the subject property as a first step.? A Feasibility Study is a process and not a report.? It’s important to be able to establish a realistic construction budget in the beginning.? Following the format below establishes what the maximum construction budget can be.?

1.??? The first question we ask the borrowers is how much did you pay for the property?

2.??? The next question is directed at the realtor.? We’ll ask them what they could sell that property for if it was in good shape?

3.??? The final question to the borrowers would be how much have you been pre-qualified for???

There’s a sample math breakdown:

1.??? Purchase price?????????????????????????? $100.000

2.??? After improved value???????????????? $200,000

3.??? Pre-qualified for??????????????????????? $150,000

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What these numbers tell you is that the limiting factor here becomes the borrower’s ability to finance any more than $50,000 of an overall construction because they are paying $100,000 for the property but can only qualify for a mortgage of $150,000.

It’s important to establish what the after improved value will be because sometimes that will become the limiting factor.? Let’s say that the borrower can qualify for a $200,000 mortgage.? That changes the limiting factor to the after improved value and the construction budget can be as high as $100,000.?

In the first 20 minutes, the consultant will walk through the property identifying the mandatory items adding up cost to repair numbers in his or her head as they go.

The consultant will than come back to the borrowers with the following advice:

1.??? The first scenario is that I’m very sorry but, I’m seeing over $75,000 in mandatory items that will have to be included in your construction budget.? This is not a very feasible deal, and we suggest that you cancel the contract and get out of the deal.?

2.??? The second scenario would be that we are seeing around $30,000 in mandatory repair items and that would give them approximately $20,000 in desires or upgrades that they could add.? That’s when we ask them if they want to continue or walk away.?

There are times when borrowers have unrealistic expectations and budgets.? It’s the consultant’s responsibility to dial in a budget to make the deal work.? We typically ask them how they came up with their budget number.? We’ll get responses like “my dad said it could be done for that amount” or “my brother ln-law said he could fix everything for X”.? The worst thing a consultant could do is to allow the borrowers to get into the deal underfunded.? If the deal is underfunded, there’s only two options later after closing.? The first would be that they use cash out of pocket to make up the difference and the second is typically that they wind up in foreclosure.? The consultant not only has to protect them from themselves, but we also must protect the lender and ultimately FHA.? Sometimes we must protect people even though they don’t want to be protected.?

???????? There are times when the borrower has already had a contractor look at the property and provided and estimate or bid.? The issue the consultant runs into is that most of the time the contactors bids only reflect the things the borrower wants to do and doesn’t consider anything about FHA’s Minium Property Standards.? That’s when the consultant must add those MPS items, and the contractor is forced to go back to the property and re-write their bid to include those items identified by the consultant as mandatory items.? We always advise getting the consultant in to inspect the property first as soon as the signed sales contract is signed.?

????????? There’s no need for a contractor’s bid or home Inspection because the consultant will perform a Mini Home Inspection and provide an unbiased cost estimate for the repairs or upgrades.? As per FHA’s 203k guidelines, it’s the responsibility of the consultant to provide an unbiased cost estimate without the use of a contractor’s bid.?

????????? As of November 2023, FHA is considering allowing an additional fee of $375.00 for a Feasibility Study.? That’s a fee that can be added on top of the consulting fee and can be financed into the overall loan.?

???????? Since this is a financeable fee, the borrower can be reimbursed this amount by way of having the lender cut them a check back at closing or applying it as a full credit toward their downpayment.? However, most consultants will collect their fees when the service is provided.?

?Sometimes the consultant will be asked to do a stand-alone Feasibility Study before the borrowers present an offer to purchase the property.? This is typically requested when the borrowers don’t have a clue what the overall construction budget should be.? It should be noted again that the Feasibility Inspection is a process and not a report.?

Another service a consultant can provide is a Property Analysis Inspection.? This entails everything mentioned above but also includes a written cost to cure report.? For an additional fee the consultant will perform a more detailed inspection and will provide a written cost estimate following FHA’s 35 categories. ?Typically, this service would include all the borrowers’ desired items.?

The cost factors used by the consultant are based on what they believe the average contractor would charge to perform that degree of work based on industry standard prices in their area.? It serves as a good base line for the borrowers to make educated decisions.?

Now a little about us

Back in 1992 and 93, I went to FHA in Washington DC twice a month for nine months and I helped FHA re-write the 203k mortgage. I am the guy that teaches it to the lenders.? I have been a 203k Construction Consultant for 31 years now and have over 10,000 renovation projects under my belt.

As a 203k Construction Consultant, we work directly for the borrower. What we do is a mini–Home Inspection of the property to identify what mandatory items need to be included in their construction budget. Once we have identified those items, we take into consideration whatever the borrower’s desires are.

When the scope of work is dialed in, we generate an unbiased cost estimate based on what we believe the average contractor would change to perform that degree of work. So, there is no need for a Home Inspection or contractors’ bid.

Once the borrower approves the final draft, we send all the reports to not only the borrower, but to the lender also. Included in our final package will be a duplicate of our bid but it does not print the dollars. That is the document given to the contractors to bid on. The lender will give our report to the Appraiser, and they will appraise the home as after improved and not as is.? At the same time, the borrower will select the contractor with which they are most comfortable.

After closing, anytime the contractor wants to get paid, they must call us. We will come out and inspect the work that is in place. We not only verify the quantity of work they have completed but also the quality of the work. We then authorize the release of the funds to pay the contractor. We are involved from conception to completion and are the only boots on the ground protecting the borrowers.

If your go to lender does not offer these loans, we can refer to incredibly good renovation loan lenders across the country. We also have a list of local renovation contractors that we see all the time. They understand these programs and are incredibly good renovation contractors.

We realize this is a lot of information, so we are always available to answer questions and assist you in getting this renovation deal structured or completed. Feel free to reach out if you have any questions or concerns as we are here to help.

Garrett Feis Sr.

404-925-7163

[email protected]