In my role as a Loan Officer specializing in financing residential rehab projects with the conventional HomeStyle mortgage and FHA 203K mortgage, I often see projects delayed. The home owners may not have anticipated such delays. These delays can lead to frustration with the process or even regret.
I would like to present my experiences with delays, what can cause them and how to try to avoid them. Many of my clients do not expect delays during the renovation process but they can and do occur, sometimes more than once on any given rehab project. I want to explain that a delay is not unusual and illustrate why.
It might be helpful to first understand all the elements involved in a home rehab project and how each may trigger a delay.
- Permits & Plans– Almost always a rehab project will require a local building department to issue a Building Permit to do various types of work on the home. This can be a simple “repair & replace” type of permit just to do new kitchen cabinets or new bath fixtures, for example, if no walls are being moved. Or permits may be specialized in areas like excavation, concrete, roofing, electric, plumbing, HVAC, etc.
Permits can be a source of delay in themselves. I have seen some communities delay for weeks issuing permits due to backlogs or lack of staff. If your rehab project requires Architects Plans then permits cannot be issued until the Architect has drawn the plans for renovation and submitted them to the local building department for review. But if the Architect takes a couple weeks to do the plans, that is another source of delay on the project. As a renovation Loan Officer I always learn in advance if a project will require an Architect and how much that will add to the cost of the project and then explain to the home owner to expect a delay in securing permits for that reason. Most General Contractors will know a local Architect so that is not someone you must find yourself. I would recommend before purchasing a property for rehab to visit the local building department to discuss what renovations you want and what exactly the municipality will require regarding specific building code updates to the home. You may not be considering all updates that must be done. These may add additional cost to your rehab project so better to learn in advance than later is my advice. Ask also how long the Permit process may take.
- General Contractor & Subs – The person who manages the project and hires all the “trades” or sub-contractors to do specific tasks is called a General Contractor. The subs can include plumber, electrician, HVAC, roofer, carpenter, floor & tile, painter, siding, masonry, insulation, concrete, etc.
Most General Contractors or “GCs” may have several different subs to hire for each job. The subs can be independent contractors who are not employees of the GC. Most subs are involved in multiple projects at once. This means that if work is stopped for an inspection by the local building department at one job, the sub may work at another job site that day. If you didn’t know the inspection schedule, this has the appearance that a sub just didn’t appear that day to work on your project. I see clients calling the GC to complain because they think a day or more has been wasted with no one working on their home. This is a normal occurrence and should be expected and accounted for in the planned completion schedule. Also, it is not unusual for a sub to withdraw from a job due to an injury or because of a delay in materials arriving at the job site. The GC may have to find a replacement sub and that can cause an unforeseen delay.
- Building Inspector– The most likely reason for a delay or a pause in work is to allow a local building inspector time to assess the work and certify it is done according to local building codes. A number of inspections are normally required by local building department officials. These can be as plumbing is being installed, as electric wiring is installed, as HVAC components and ductwork are installed, etc. Usually two types of inspections will occur. The initial inspection is sometimes referred to as a “rough” inspection, meaning that prior to finishing the work the inspector must review it. The review would be scheduled in advance by the GC. The point of frustration for a home owner is that the building inspector may be on a 2 week lead time or out on vacation or out during the end-of-year holiday period. Also a local government may have building inspectors that are divided into specialties like plumbing or electric, meaning two inspectors may have to schedule time into the home to view what each specializes in for an inspection to occur.
Inspections may be staggered over some period of time such that a dry wall contractor cannot install and close walls until both the plumbing and electrical inspectors have viewed the work done. Then later there may be a follow up or final inspection given the inspector may have found areas where work has to be altered in some way to meet local building codes. This process in itself can cause a project to run late but is not unusual.
My advice is to build in “inspection waiting time” when planning your rehab project with your GC. By that I mean there will be days or even a week or two when almost nothing can be done on your project due to the inspection schedule. Generally there will always be an initial or “rough” inspection, perhaps more than one if work has to redone and later a “final” inspection. The “final” serves to validate that the home is completely finished and ready to occupy. Each serves a purpose that may not be readily apparent to a home owner. The purpose is to insure the health and safe use of the home by the occupants. No one is trying to waste time or money or cause extra delays. Rather, inspections are done to be certain the house is safe, healthy, sanitary and secure to occupy, with all work up to current building codes.
- Materials & Supplies- It is not unusual for a project to be delayed just waiting for materials. I have clients who will occasionally order custom cabinets or faucets or other items from an out of state or out of country manufacturer. Waiting for an order to arrive can be a source of delay if nothing else can be done until a particular component is installed. For example, if kitchen cabinets are ordered and arriving late, then the kitchen cannot be finished. I have seen this happen which then delays counter top installation and appliance installation. My best advice is to be mindful of where materials are coming from and plan accordingly.
- Weather- On a major rehab where a new roof is to be installed or a trench dug for foundation work, weather can be a delay factor. Your GC can help you plan out the work schedule to take advantage of milder weather so a project can continue in winter. I have seen simple rain delays on siding or window installation. Not much can be done except anticipate what must be done outside and plan around the seasons in your area. If you see a day when siding or a roof was to be installed and it’s raining, then it would be normal for those subs not to be there and time will be lost.
- Changes & Deletions- This source of delay is the one that with proper planning, may be mostly avoided. In a project that was not thoroughly planned out by the home owner and GC, there can be changes desired as the renovation unfolds. I have seen a wall moved that wasn’t originally planned or more lights added or more expensive materials or any number of other changes a homeowner elects to make as the renovation starts to come to life. I always counsel my clients to fully envision each room from the bottom to the top and plan each detail accordingly from the beginning. That way the work is known up front along with the correct budget to execute it to help avoid delays. I wrote a Blog recently about how to plan a rehab for this reason at: https://perryfarella.com/2016/10/plan-successful-home-rehab-bottom-top/ .
Below I want to list several specific situations that can be encountered causing delays and explain to potential home rehabbers why they may occur.
- Electric cables coming into a house too close to a window or just hanging too low
- Many times electric cables coming to a house from an outside utility pole may no longer meet current building code where the cables connect to the building. I have seen local building inspectors require the cables be moved farther away from a door or window than currently in place. Or they may just be drooping and must be tightened to hang higher. This is something that may not have been anticipated and causes a delay.
- Adding a new bath or new laundry room
- This can trigger a local building inspector to require a new, larger water service pipeline to be connected from the main source to the house. This can add to cost as well as cause a delay. If you are adding any new water “service points” like an extra bath or laundry room do consider this possibility.
- Electrical panel too close to a furnace or hot water tank
- I have seen some municipalities require the main electrical panel to be moved a few feet for safety reasons. Often a delay and cost increase not foreseen up front.
- Requirement for a Fire Sprinkler system
- Here I recommend checking in advance with the local building department to see if current code now requires a home to be equipped with fire sprinklers. I have seen municipalities enforce this rule based on the size and scope of a large home addition or remodel. Not only can this add additional cost and delay but it may trigger a new, larger water service pipeline installed to supply it.
- Discovery of old wiring
- In older homes there may still be wire wrapped with cloth insulation which degrades over time, possibly exposing live wires. This is something that may not be seen initially but can cause a delay while plans are made to address it.
- Basement ceiling height too low
- In a rehab project where a basement is to be finished, it may be that the height of the celling has to meet certain building codes. I have seen clients have to add the time and cost to dig out the basement foundation floor to gain the needed depth to meet current building codes on ceiling height. If not foreseen up front this can add both a delay and extra cost to a project.
- Removing prior work not done to code
- I have seen homes where a prior owner did rehab work without securing building permits and did the work in a way that is dangerous or not permitted. My advice is to check with the local building department when planning to buy a home to rehab so you fully understand what may have to be done rather than wait until the purchase is closed and your GC is buying permits and gets the bad news. Not only will there be delays but likely cost will increase.
As a way of planning for delays, the HomeStyle and 203K renovation mortgages offer a kind of buffer in terms of easing money concerns on a rehab project. The buffer is the fact that a borrower may finance up to 6 months of house payments into the rehab loan. If a property cannot be used for up to 6 months this can be helpful as a home owner may have to pay for housing at their current location AND on the new property which can be a hardship. Also by having the 6 months of house payments built into the rehab loan, the impact of delays can be eased financially.
Another way a home owner is protected against delays and cost overruns is the Contingency Reserve. Both HomeStyle and 203K rehab mortgages have at least a 10% of budget reserve. This is based on the labor & material budget. For example if the budget for rehab is $50,000 then the minimum reserve will be an extra $5000 in the rehab loan. The extra $5000 will be set aside to be used only for an unforeseen health or safety issue that must be repaired. The reserve can be set as high as 20% if need be. Later if the funds are not needed at project end, these funds can be used for extra work or to pay for appliances. Bu if never used, the funds are then subtracted from the final loan amount.
I hope writing about delays has been helpful. My goal is to educate everyone as much as I can about how a rehab project works and how projects can be financed. The process is very similar whether you already own a home you wish to remodel or are purchasing one. Let me know what questions I can answer.
Perry Farella 773 248 8422 email@example.com Down payment and terms shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Please contact us for an exact quote and for more information on fees and terms. Not all borrowers will qualify.