Watch out on FHA 203K Streamline loans - The contractor can get screwed!

By
Real Estate Agent with Lyon Real Estate, Fair Oaks CA (Sacramento Area) DRE# 00809499

I've probably sold my last home on an FHA 203K Streamline loan.  They seemed pretty cool, and last year I sold 3 homes with them.

But yesterday's call changed all that. "Sally, I haven't been paid on the second half yet", said the contractor. "9,350 bucks worth".

We had been told the last draw, which is half of the contractor's bid, would take about 4 months from the completion, so had not worried.  The bill had been submitted to the client, and they had their final inspection with B of A. It had only been 9 weeks.

I called B of A just to check. "Hmmm.  You'll have to talk to the homeowner.  We closed out this loan, and the money has been applied to their principal reduction. You'll have to get it from the homeowner.

"WWHHHAAAAATTTTTTT!!!!! They don't have any money!  If they did, they wouldn't have needed your frikken loan!!!" I think I threw in some four letter words, as well. 3 to be exact.

Seems like after the final inspection by B of A, the homeowner needed to submit the final bill and a statement of completion to the bank. They didn't do it. So the bank waited 30 days, then gave the homeowner back the money in a principal reduction. Never told the contractor.

Since the contractor is out of the loop, there is no way in Hell he could have protected himself. B of A didn't notify him he wouldn't get paid, either.

How can they screw the contractor like that? I am seeing fireworks over this. I've called the originated lender, and they said they will get it straightened out, but this just happened Friday at 3:30. So far, no word. I'll give it til Monday, then all Hell will break loose. I'm prepping the Kraken right now.

I'll update you as this progresses.

Have you had this happen?

Posted by

_______________________________________________________________________________________________ 

Your Fair Oaks Realtor for homes for sale in Fair Oaks and the Sacramento Area of California.... I'm your gal (Sally Dunbar). I'm occasionally knowledgable, periodically humorous, and always willing to tell you everything I know.  What more could you ask for?

Here are the newest listings for Fair Oaks, Orangevale, Citrus Heights, Folsom, Carmichael

Sally's Website at www.sallydunbar.com to search for all homes in the MLS, and for tons of information for buyers and sellers.  You'll find schools information, market statistics... you name it, I got it!  Come visit me.More Blog posts by Sally Dunbar at www.FairOaksHomesAndMore.com

 

 

 

Sally Dunbar, 30 year Broker Associate, Lyon Real Estate, Fair Oaks, CA (916) 524-1548, SDunbar@GoLyon.com "Your Fair Oaks Realtor"

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Topic:
Lending / Financial
Groups:
Bartender, Make it a Double
Club Chaos
Crap
Diary of a Realtor
Lyon Realtors
Tags:
fha 203k streamline
watch out for 203k streamline loan
loan problems
b of a
screwed
problem loan
contractor
problem
bank of america

Anonymous
Post a Comment
Spam prevention
Spam prevention
Show All Comments
Ambassador
1,555,674
Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth

Sally, this is a BIG MESS. I hope the contractor as a start got at least 50% paid up front. I don't know how BoA can act this way?

Jun 18, 2011 12:49 PM #5
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

The way these work, the contractor signs the contract with the homeowner, then at escrow, gets paid half of the funds.  Then they do ALL the work. so at this oint, they are out of pocket quite a bit. In this case, there were subcontractors for roofing and  replastering, so the contractor was not making that much on this himself.  It's then up to the homeowner, apparently, to be sure the loan gets completed and the contractor gets paid.  But apparently, there is not much  motivation on the part of the homeowner to make sure that happens, other than the goodness of their heart. 

And yes, the contractor can file a lien, but with declining values, what good is that? If I were a contractor, I would avoid these like the plague!

I'll keep you posted.

Jun 18, 2011 12:58 PM #6
Rainmaker
598,882
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Sally - Having done a few of these loans too, I am no expert but I have never had this happen in any of my 203k transactions.  While they were all challenging, I do know for a fact that all the contractors got paid. 

There was one particular transaction where the homeowner still had funds available and wanted to do some additional work with the remaining funds that he had qualified for and that were available.  He even provided all the documentation verifying that the work could be done and in one day with the remaining funds.  The lender wouldn't allow it and applied the remaining funds to the principal reduction.  My borrower was not pleased.

Don't let what BofA and one buyer discourage you though from doing more of these loans.  They are still good loans but they do need to be done in a certain way.  Knowing what you know now, you are the perfect one to prevent this from ever happening to anyone again.  For starters, stop using BofA for them.  They're a horrible lender.

Jun 18, 2011 03:35 PM #7
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Donne - Looking at this from the viewpoint of the contractor, it's pretty risky.  They don't have much of a hammer. they can lien the homeowner, but what are the chances of getting paid?  Much less than with a regular homeowner who probably has the money to begin with.  And with these, the contractor has no access to the process, to ensure they get paid. Once the principal reduction happens, the homeowner STILL doesn't have the money to pay them with - it simply sucks.  I had no idea the exposure for the contractor was here.

I'll post the results here....

PS how is the new career going?

Jun 18, 2011 04:11 PM #8
Rainmaker
898,752
Jane Peters
Power Brokers Int'l - Los Angeles, CA
Connecting you to the L.A. real estate scene

Oh dear, this is an unpleasant experience.  I hope the contractor gets his money.  I am wondering why he can't go after the homeowner?

Jun 18, 2011 04:39 PM #9
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Jane - he CAN go after the homeowner, but you can't get blood out of a turnip!  If they had any money, they wouldn't have needed the loan. If they can't/won't pay him, his only remedy is to put a lien on their home.  But values have gone down since they bought, and there is probably no equity in the home.  Besides, a lien only gets enforced when they try to sell.  They just bought, and plan to stay forever. so he will probably NEVER collect.

So Mr. Contractor is screwed.  And he did a ton more work than was called for, becasue he is a good guy.

Jun 18, 2011 04:47 PM #10
Rainmaker
271,045
Jack Mossman - The Nines Team in Lodi
The Nines Team at Keller Williams - Lodi, CA
The Nines Team in Lodi

Sally - We will be watching closely ... we are in the process of organizating an office-wide marketing outreach for potenital 203K properties .... while I'm not ready to pull the plug .... I may just slow it down as bit as I follow your results.

Jun 18, 2011 05:48 PM #11
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Jack - It is still a great program, as it enables buyers to buy homes that are not perfect.  If they are not perfect, it's tough to get a loan (like a bad roof or even peeling paint).  But with the 203K the buyer can consider homes that only need a roof and carpet. In theory it's great.  I just didn't realize the exposure the contractor had.  It seemed to me that as long as the contractor was willing to wait forever for the second half, it would be a guaranteed pay, assuming they finished the work. But not so...

Another issue, as Donne pointed out above, is if the buyer wants to do something outside of the scope, or switch something other than what was bid on.  On this particular job, the bid called for a new bath vanity, but then the buyer decided they wanted to completely remodel the bathroom later, and didn't want the new vanity.  They wanted something else instead.  But NO... the loan required they install the vanity, whether they wanted it or not.

There is such a steep learning curve with these.  One tip is the contractor needs to be not only licensed, but must have liability insurance, and workers comp, unless they do not hire ANYONE.  MANY contractors do not have liability insurance, so that eliminates the buyer's Uncle Joe doing the job.

Also - you can't use the 203 money for anything other than the home - so if a shed has peeling paint, you can't do this loan, unless the seller will agree to fix it. I got trapped on that one. Mysteriously, the fix-it fairy had to paint the shed before close of escrow, since the REO bank refused.  Jerks...

Jun 18, 2011 06:31 PM #12
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

OK... I got one more.  There is a 10% contingency that 203K guidelines allow, but not all lenders recognize it.  So if your buyer has a bid for $20K, some lenders add $2K to the loan, and loans them $22K.  The contractor's bid is for $20K, and the additional $2,000 contingency can only be used for health and safety extras that pop up. I think this is what Donne was speaking of, where her buyer could not use the extra for something elective.  ONLY for unforseen health and safety issues.  If it's not used it gets applied to a principal reduction. ERGO, the screwball system that allowed my contractor's full $9,350 to get applied to the homeowner's principal.

Jun 18, 2011 06:38 PM #13
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

DeeDee - it's not as if BofA didn't know the contractor was doing the work, or was due the money. They had copies of the contractor's signed contract and practically his first daughter's birth certificate.  They knew....

 

Chris Ann - the check gets sent to the owner in both of their names - the contractor AND the homeowner.  So they sign it, then deliver it to the contractor.

Jun 18, 2011 06:42 PM #14
Rainmaker
515,459
Mary Douglas
United Country Ponderosa Realty - Red Feather Lakes, CO
REALTOR, Red Feather Lakes, Colorado

Sally, what a mess, I can't help but think that the person flipping the switch at BofA was asleep at the wheel!  Reverse that principal reduction and write a check to the contractor EL PRONTO, or suffer the wrath of Sally!   In Colorado a mechanics lien can take priority over a mortgage.

Jun 18, 2011 06:59 PM #15
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Mary - I'm getting my Kraken mask ready for Monday, if I don't get a quick reversal.  Oddly, the buyer won't return my calls, or the contractors either.  I'm trying not to jump to conclusions here, but I have to believe they have noticed the principal reduction took place, and they are willing to let the contractor take the fall.  I better quit... I getting ready to type four letter words.

Jun 18, 2011 07:05 PM #16
Anonymous
Anonymous
Gary Smith

I'm a 203K Consultant in MS. This sounds like a streamline loan? Am I correct?

Jun 19, 2011 10:50 AM #17
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Gary - yes it is... Any input?

Jun 19, 2011 11:01 AM #18
Rainmaker
271,045
Jack Mossman - The Nines Team in Lodi
The Nines Team at Keller Williams - Lodi, CA
The Nines Team in Lodi

Sally - thanks for the follow up and feedback ... I appreciate your passion and fair-handedness in evaluating the program ...  thanks!  I did send your post to Mike Young a 203K consultant in Farifield and AR member and asked him to read and comment as he thinks appropriate.  Hopefully that may add another dimension to the dialog.

Jun 19, 2011 03:30 PM #19
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Jack - Yes, Mike did contact me.  I'll wait to see what happens then continue my dialogue with him.  Thanks for the connect.

Jun 19, 2011 04:51 PM #20
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Update - I got the loan originator involved (who was awesome, by the way - Vitek).  The owner claimed they didn't know they had to submit anything, although B of A says they have tried to contact them for a month.  Supposedly everything has been signed.  But now the check goes to the owner to cosign.  We'll see if they will continue to be engaged in the process, and will send the check to the contractor.

These are still a pain.....

Jul 01, 2011 10:27 AM #21
Rainmaker
271,045
Jack Mossman - The Nines Team in Lodi
The Nines Team at Keller Williams - Lodi, CA
The Nines Team in Lodi

Sally - I keep watching for a further update ... is everything back on track with the contractor?  Thanks ..

Jul 15, 2011 05:59 PM #22
Rainmaker
201,448
Sally Dunbar
Lyon Real Estate, Fair Oaks CA (Sacramento Area) - Fair Oaks, CA
Fair Oaks Realtor - Fair Oaks Homes for Sale

Update.... AFter contacting the original lender, they jumped all over BofA, and greased the wheels to get the paperwork finished that the owner's had neglected.  B of A reversed the principal reduction, and the check is now in the bank account of the contractor.  All is well.

But I do see where if the owner wasn't engaged in the process, this could go on forever, leaving the contractor to levy a lien - we all know how effective that can be!

Jul 15, 2011 06:04 PM #23
Rainmaker
271,045
Jack Mossman - The Nines Team in Lodi
The Nines Team at Keller Williams - Lodi, CA
The Nines Team in Lodi

Thanks Sally - so I'm guessing that if we value our contractor relations ... we need to stay engaged at some level ... even if we're just taking the pulse of the transaction.  I appreciate your feedback.

Jul 16, 2011 11:03 PM #24
Anonymous
Post a Comment
Spam prevention
Show All Comments
Rainmaker
201,448

Sally Dunbar

Fair Oaks Realtor - Fair Oaks Homes for Sale
Ask me a question
*
*
*
Spam prevention

Additional Information