The following story is NOT about any one lender as there are a few out there that do this... I had one that ordered a "feasibility" each time he really wanted a full consultation. He will never change.
Recently a lender hired a consultant and asked the consultant to call the client to set up the appointment. The consultant called the client to make the appointment and indicated he would need to pick up his fee at the time of the inspection and it would be $729 which included the mileage fee based on the projected construction cost. This is a typical fee for our services btw.
The client proceeded to tell the consultant that the lender told him it would only be $400 and they would bill the balance to the escrow if they decided to move forward with the project. If we move forward then the rest of your fee would be billed to the escrow and you would credit the $400 paid for the feasibility report (3-5 pages) to the full report (25-30 pages).
The first problem is that the lender failed to share this little arrangement with the consultant and get their approval. The second problem with this is that the lender had no business discussing our fee payment terms and what we might bill to escrow as they aren't required to help us get our money in the event the client doesn't pay as agreed without doing so in advance. It makes us all look bad. The guideline is clear that the consultant is repsonsible for collecting their own fees from the borrower.
In any case, the client was told that they just needed a feasibility report at this time.
Lets step back and look at this from the lender's prospective
1) Lets order a "feasibility report" and see if this project is even doable... [sounds good for everyone]
2) If it is feasible to move forward we will order the full consultation [Also sounds good for everyone]
3) If it dies here the client is only out the $400 feasibility fee [Good for the client too]
Problem for the client
1) The feasibility analysis is a very quick run through the property, NOT a home inspection. This takes right at 30 minutes to conduct the actual field inspection. We are just looking for the deficiencies to bring the property to the FHA MPS {Minimum Property Standards]. This is a "tool" that helps with the negotiation of the price with the seller.
2) The client may want more than this, the client may want to know how much it will cost to add the new kitchen and bathroom as well as to meet the MPS. This makes it a "consultation" and it is no longer a feasibility. This is fine but changes the game plan.
3) A true feasibility report, by design, is "INSUFFICIENT" to solicit bids. If you give the client more than this it is the consultation/home inspection/full report and no longer a "feasibility" and the consultant has earned his full fee. Some lenders have been purposfully calling a "consultation" that includes a property inspection report and bid specs a "feasibility".
4) A feasibility report is a separate product and used ONLY to help with the negotiations of the sales price when used properly and benefits all concerned.
5) If the project is a viable project and looks like it will fly there is no need for a "feasibility" in fact it wastes time and slows the closing.
6) What we do different is to make the full inspection, if upon that inspection, it is found this project is not feasible, we flip it to a feasibility and write the limited report so the sales agent has a tool to renegotiate the price and then we charge the lessor fee. But we have had the time to actually inspect the home more fully and now have a much better idea of what is needed.
7) If we go out to do a feasibility report and run through the home quickly make the report and then the full consultation is required, It will require another more extensive inspection and thus carries another "full fee" for the new product.
We have done hundreds of "feasibility analysis reports" and they typically result in saving the client $15,000 to $75,000 and some have saved the client from buying a home that would have slid off the hill. I remember one that there was so much subsidence that I was able to show the client where the home had actually moved nearly two feet towards the street. The fix was about $200,000. The agent called me later and said the sellers hadn't disclosed that fact but seemed to know it when they dropped the price by $175,000.
My question to you is "was the $350 fee we charged for this feasibility worth the fee paid?" Of course it was, so was the one where the sales price was dropped by $15,000. It clearly has it's place.
When doesn't it have it's place?
If you are trying to close fast, then don't waste your time with a feasibility report. When you provide your consultant with the "construction budget" figures order the "full consultation" and with that budget in mind we make the proper inspection at the get go, and allow enough time to do that. In the event we see the project is way over budget we automatically change gears and provide the lessor report at the lower fee and send the Realtor back to renegotiate the price.
Lets address collecting our consulting fees up front which is standard practice
The consultant is like a home inspector or appraiser in that regard, we all collect our fee up front. The unique thing about our fee is that it is typically reimbursed to the borrower at closing of the loan. You can actually provide an "escrow instruction" to your title company or attorney and let them know you have paid $729 (in this example) to the consultant and you want that accounted for and added to the borrower's contribution to the escrow.
The FHA guideline is very clear on the collection of our fees from the client to state that the lender IS NOT required to help us collect our fee. Therefore the LENDER doesn't have the right to tell us to take our fee at closing. They don't have any say in our fee collection process. They certainly shouldn't be making promises that haven't first been okayed by the consultant about those fees.
Conclusion
If you want to close faster order the consultation. If you have lots of time by all means, order a feasibility but if you want to save money and want to move into high gear to get your loan closed faster then order the Consultation and forgo the feasibility report. As long as your consultant has your construction budget in hand, you should move much faster to a close. Payday for you and then the work can begin.
There seems to be a disconnect between the lender's definitian of a "feasibility report" and what a feasibility report actually is. We have lender clients ordering "feasibility reports" pretty regularly and when quized on their order it turns out the were actually referring to a full consult.
Definitions are as follows: What we do for our fee
Full consultation
The consultant will go over the rules of the 203k project parameters, discuss some offence, assist with ideas of how you might better utilize the space, get the most bang from your buck, and work with the client to provide a “scope of work” that includes the HUD/FHA minimum property standards (MPS) and what the client may want over that minimum while keeping in
mind the amount the client’s budget. We then provide a comprehensive report that includes about 99% of the paperwork the lender needs to go to underwriting. This process was designed to take two weeks. Sometimes a bit less, sometimes a bit more time will be required.
Feasibility Analysis
This is a quick look at the property for the buyer or the seller of a property.
Sellers Report
- If a seller wants the highest possible amount for their property and they understand it needs work this product is a must. We provide a limited report that identifies the items that are health and safety or of necessity under the HUD/FHA Minimum Property Standards (MPS). This is all the seller is interested. What repairs are needed to bring my property to the MPS to get it sold.
- If the seller is a bank or lending institution we also provide an estimate of the cost for repairs that most potential buyers might do such as update the kitchen or bathroom(s) where they were adequate for MPS. This gives the potential buyer info they need to make a decision now.
Buyer's Report
- If a buyer is about to place an offer on a property that requires repairs they must have a clear idea of the cost to make the repairs. If the property is being sold for $250,000 and needs $150,000 in repair it must appraise at $400,000 or it doesn’t make any sense to buy it. If the value after improvements to MPS is only $350,000 then the home is only worth $200,000 “as is”. Knowing that number for the repairs is part of your due diligence prior to purchase of a fixer.
- On the other hand, the buyer may also want to know the cost of the additional repairs they may want to add to the mix. In that case a Feasibility Analysis from The Mike Young Team will also provide a quick estimate of those repairs as well. So you actually get two estimates, one for MPS which is used to help you with your offer and, the second one with your additional improvements that make this YOUR HOME.
Mike Young, 203k Team Leader 
We have fourteen offices in CA covering both CA states, NorCAL and SoCAL where we can cover the entire state.
To learn more about the FHA 203k loan program go to www.203kOnLine.com. To contact us for a consultation please go to www.my203kconsultant.com and "order a consultation". If you like what you see here please take a look at Another blog by Mike Young in Spanish and other languages.
Got a 203k project giving you "fits" contact www.203k911.com. If you are looking for quality203k software for consultants to speed up the underwriting process..
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