Avoid Pitfalls with Rehab Loans

I did some research recently and discovered that since our beginning HAS Inspections has performed over 600 rehab loan inspections (203K/HomePath/HomeStyle). That’s a substantial number and one result has been that we’ve ‘seen it all’ including a number of pitfalls buyers run into on the construction side of the project. Among the biggest, if not #1, is misunderstandings with the chosen contractors about how the process works. A second one, closely behind the first, is ‘handshake’ agreements to do extra work or alter the original scope.

There is a large packet of documentation that must be signed by all parties before the loan can close and work begins, and in that packet are instructions on how the draw process works for the contractor; however, it has been our experience that the contractor seldom actually reads it. So a question we hear often just after the bank says work can begin is “where’s my deposit?”, or, “I need money to purchase this or that”. One contractor recently told me, “I’m not the bank”. Here is where it can become tense for both the contractor and owner: in loans that require a consultant the contractor is expected to finance the work up through his first request for payment. This pitfall can be avoided if the contractor is fully informed from the beginning of the project and properly vetted for financial capability.

The second pitfall is more difficult to regulate because everyone innocently asks their contractor to do some small extra things while he/she is doing the big things on the agreed-upon scope. The problem comes at the end when the contractor thinks he/she should be paid for some of those extras and the owner remembers the contractor said he/she would ‘throw them in’. To avoid this all extra work, no matter how small or innocent, should be agreed upon in writing signed by both the contractor and the owner with clear descriptions of the work covered and the prices charged.

The rehab loan process can be very rewarding (we have one client who bought a large home on acreage for $120,000, paid $80,000 to remodel, and recently got an appraisal of $305,000), but it can also be very frustrating if the pitfalls aren’t avoided. These are two areas that with just a little careful attention can be avoided and the journey made a little more pleasant.

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