Choosing the right 203k contractor is scary for most people. Add an FHA 203k loan into the mix, along with lender contractor requirements, and it’s downright confusing. When working with 203k loans (and I’ve done hundreds of them), I always gave specific guidance to my clients on how to choose the right contractor.
Follow these suggestions to choose a good FHA 203k contractor
Hire a Real Contractor – Don’t overlook this point; it is probably the most important. Look for a contractor that is a contractor all the time, not someone who is an accountant by day and contractor at night (no offense accountants). You don’t want a contractor that works out of the trunk of his car or his spouse’s minivan. Contractors that are in business full time are the way to go.
Permits – Some contractors say it’s better to not get a permit. I hear this all the time, and it’s generally a lie. Competent contractors pull permits. Besides it being a requirement for all FHA 203k contractors and most lenders, it can really cause a lot of pain for you with the city or town you live in to not have a permit. I’ve seen people be forced to rip out all of their newly rehabbed kitchen because they didn’t pull a permit. And, yes, permits are required on 203k loans.
Licenses – Would you go to a doctor who doesn’t have a license? It is not difficult for a contractor to get a license; generally, it’s proof of insurance, and depending upon the trade, proof of competency. If the one you’re looking at doesn’t have one, skip him or ask him to get one. The lender that originates your FHA 203k loan will want to see their license too.
Insurance – This is non-negotiable. Hire only contractors that have liability insurance and workers compensation for obvious reasons. Real contractors have insurance; they want it just as much as you do.
Referrals – There are many places to get a recommendation for a good rehab contractor. Start with friends and family. Try your Realtor or lender. But, there is a catch with referrals. Never use a referral if the contractor is a “friend” or “family member” of the person referring them to you. It may turn out ok, but more often than not, it doesn’t.
Also be wary of kickback fees. Be bold, and ask the person giving you the referral and the contractor if they are paying or receiving a referral fee. No one should be paid a referral fee simply for providing a connection. Think about it; where is the impartial opinion when the person giving you a recommendation knows they will get a 5% or 10% cut from the contractor?
If the people you know don’t produce some good results, try your local hardware store. I have hung out in the electrical section of Home Depot and Lowes and just waited for a contractor to come and talk to.
Steps to Take in Vetting a 203k Contractor
Don’t make the mistake of just assuming a referral means they are a great contractor. It is very important to always keep an open mind and do some reasonably in-depth due diligence on a contractor. The fact that someone did a good job for one or two other people is a good sign, but to ensure your rehab success you should complete your vetting of the contractor with several other pieces of information. You may not be able, nor want to do them all, but definitely do some vetting.
References – A professional contractor should have at least three non-family, recent references; most will have a lot more. Don’t be rude, but don’t be afraid to ask tough questions when you speak to the references. You can settle for looking at photos, but it’s ok to ask to actually inspect a recent example of the contractor’s work. A solid, long-term contractor should have a couple of clients who are willing to let him at least briefly show you their homes.
Better Business Bureau – Check with your local better business bureau; this is an easy step to take that can save you a lot of hassle. Make sure to check for complaints under both the company name and the name of the contractor.
Cash Flow – Since the FHA 203k loan requires that a 203k contractor be able to cash flow the project, I would make sure that the contractor has the ability to do so. The contractor must be able to start the project without requiring any money up front from you. They should have the ability to purchase materials and pay their employees and subs while they wait to receive a draw from the lender. The one exception is the streamline 203k which allows for up to one half of the repairs to be paid to the 203k contractor at the loan closing. However, not all lenders will permit this, and I would still not be in favor of hiring a contractor that wants you to cash flow his business.
Previous 203k Contractor – Most contractors have never worked on an FHA 203k project; that should not disqualify them. However, it is a great positive if a contractor you’re looking at has worked on a 203k before. They should be able to explain to you the 203k contractor requirements and be familiar with the process and what forms are necessary.
For larger jobs I would insist on a little more information. If you’re planning on giving someone $40,000 and allowing them to spend months in your home, they better be willing to prove to you they are worthy.
Do a Credit Check – Ask for permission to run a credit check on both the company and the contractor. You don’t necessarily need to see the full report, just make sure there are no bankruptcies or recent debt charge offs. If you see a lot of past due credit cards, that could mean they are using your money to pay off a previous job.
Background Check – Do a criminal history check on the contractor – This step is especially important if you are going to have the contractors in your home when you are not present. It can take a little extra time and money depending on the state where you live, but could be well-worth it if you turn up a major red flag.
The FHA 203k loan requires a real contractor that can complete your project on time. Interview real full time contractors and expect them to be able to answer your questions and prove to you they are capable of completing your project on time and on budget.
As a final point, do not simply look for the lowest priced contractor. Look for the most competent contractor that is familiar with your type of project. It will be cheaper in the long run.
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