Home Financing is a very complex process; Construction is a very complex process. Combining the two can be an extremely complex process. Accurate information and good systems make this much easier. However, I do not want to indicate that any of what I am sharing here will ensure that nothing will ever go wrong.
Even with the level of experience I have in this specialty area, we still have challenges that come up on occasion. The intent of this site was to provide honest, practical, and accurate information. There was clearly a desperate need for this. The purpose was to give everyone useful and applicable information on how these specialty programs really work and how to make them work better.
These options offer some excellent solutions and opportunities. In the interest of full disclosure though, I think it is also important to present some of the experiences we have had over the years where issues have come up. Hopefully this will help you to avoid these same challenges, and make you better prepared to deal with them if and when they do occur. Most of these experiences were on my own transactions. Some were on transactions I was not involved in but Contractors, Loan Officers, or Realtors reached out to me for assistance in finding solutions.
I had a Streamline 203K transaction a few years ago where the sale closed and the Contractor went out to do the work. When the work was completed we were contacted and sent the Appraiser out to re-inspect. The appraiser was unable to sign off on the work because the Kitchen Cabinets had not been installed. This sounded so bizarre that I actually had him confirm he had gone to the right house. He assured me he had. I called the Contractor and asked him what I was missing. This Streamline 203K included installing these cabinets. It was bid, appraised, and underwritten under that premise. He informed me that the buyer had run into an old friend from high school and found out he was in the cabinet business. His buddy had offered to install the cabinets for free. The contractor had agreed to install some flooring instead of the cabinets and let his buddy do the cabinets. He didn’t see an issue here since the total he was charging was still within the bid. He wasn’t too happy when I informed him that the Streamline 203K funds were not going to be released until the Streamline 203K work was completed.
It turns out that when your High School buddy that you haven’t talked to in 20 years offers you free work, you are not necessarily going to be his highest priority. What followed was almost a month of a very frustrated Contractor. Eventually, we got it worked out by the friend providing the cabinets and the Contractor installing them for free so he could get paid. The moral of this story is; The work performed must be the work that the loan was based on.
In another instance – we had an issue where the buyer’s loan closed, the Contractor went out and completed the work, and when they went to process the release of the balance he was due an un-cleared lien was discovered. This should have been addressed when the sale closed but it was somehow missed in escrow. The policy regarding clear title was pretty strict and they would not release the Contractor’s money because of this. Obviously, this had nothing to do with the Contractor but it took over a month to get this addressed. Since it was taking about 30 days to process the second payments at that time, this added an additional month. The moral of this story; It is very important to understand that there are many moving parts to this. I do not care what the guidelines say, there can be unanticipated issues that arise that can create delays in getting these payments processed. Since this is part of a government insured loan, it is safe to say that you should always get paid eventually. I just recommend caution in regards to commitments that you make that are dependent upon the timing of the payment for the completion of these jobs. I am very upfront about this with every Contractor we ever deal with. I want to make sure they are able to plan accordingly. Generally, their second payment is processed within about 30 days of the work completion but this is certainly not guaranteed.
We had a few occasions where the buyers just would not commit to finalizing their decisions on the bids. This created a serious delay in getting a couple of transactions closed. We really pride ourselves on how efficiently we handle these products and I have to say that these buyers were causing us a lot of stress. The moral of this story; This issue led us to implement our policy regarding timelines and expectations. We created a form that we require to be signed by the buyer(s), Contractor, and buyer’s Realtor that insures that everyone is very clear regarding the necessary incremental timelines and the consequences involved for surpassing those dates. This has really helped to solve this issue. We make it very clear that we must inform the Listing Agent early in the transaction that the closing is going to be delayed due to the failure to perform on the part of either the buyer or the Contractor. This ensures that the buyer understands the consequences of indecisiveness and has time to secure the services of a different Contractor if that is where the delay is being created.
I am happy to say that the vast majority of these go very smoothly and without incident. It is important to know though, that things can go wrong.
Sacramento 1st DBA Comstock Mortgage – Lic : 01390474
Kevin Nunn – NMLS 305826 / DRE 01158674
