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LI firm takes advantage of 203(k) loan boom

Lorraine Schulz and Patrick Tracey are partners in

Lorraine Schulz and Patrick Tracey are partners in Summit Remodeling of Wantagh. They have gone after a niche market that uses a mortgage insurance program to let people use one mortgage to both buy and remodel homes. (Dec. 7, 2012) Credit: Johnny Milano

For a contractor, it may not sound appealing to forgo payment until a home renovation job is completely finished and has been reviewed by a government-approved inspector.

But soon after starting Summit Remodeling in Wantagh, co-owner Lorraine Schulz discovered that it was worth the effort to help people navigate so-called 203(k) loans -- a mortgage insurance program that lets people use one mortgage to both buy and remodel homes. The loans are administered by the Federal Housing Authority, a unit of the Department of Housing and Urban Development.

Despite the red tape involved in the projects, Summit has developed a niche doing 203(k) renovations, making a marketing advantage out of its expertise in working with the complex program. Schulz says the company does about a dozen 203(k) projects a year, ranging from about $60,000 to $250,000 each.

"It's no wonder there's not a lot of contractors out there who do these," says Schulz, who opened the company with co-owner Patrick Tracey in 2007. But, she says, "We're never not working . . . Even if we're not making a huge profit on it, it pays the bills."


For small-business owners, it can make sense to master a specific skill that others find unpalatable. "More and more companies are going toward niche marketing," says Jack Signorelli, managing partner of Soundview Business Solutions, a consulting firm in Northport. "It's easier and faster to become an industry expert in a niche . . . than to be a hero to everybody."

The 203(k) program is designed to make it easier and cheaper for home buyers (and existing owners) to rehabilitate older homes. Often, buyers take out one mortgage to purchase a home and have to take out a separate loan -- typically with a higher interest rate -- for home improvement projects. But through the 203(k) program, FHA-approved lenders offer a single, more favorable loan that covers both costs; the government then insures the loan.

While these types of loans may be a no-brainer for a buyer, there is at least one significant obstacle for a contractor: In just more than half of 203(k) projects, a contractor will get paid only after a project is completed and scrutinized by an FHA-approved inspector; for the rest of the loans, called "streamline" 203(k)s, the lender can agree to pay the contractor up to half of the money in advance, but it's at the lender's discretion.

That means Schulz has had to develop relationships with vendors and subcontractors who understand they'll get paid only after the fact; her vendors, she says, offer 60 to 90 days of credit because they know Summit is reliable. "They know they're going to get paid," she says.

The cash-flow complications are even more acute post-superstorm Sandy, Schulz says, because for certain types of work, a town inspection must take place before the FHA-approved inspector can take a look. Since the storm, town inspectors have been swamped, so the appointments are harder to come by. Schulz says she has two projects awaiting town inspection; as of early January, she had about $70,000 that she couldn't collect because of the delay.


But for Schulz, the upside of the storm could be a rise in the number of people using the 203(k) loans to buy storm-damaged homes that need renovations. Indeed, she's already gotten some inquiries.

And even aside from storm-related purchases, the loans have gotten much more popular recently, according to HUD. In 2007 there were 423 203(k) loans made in New York State; that number jumped to 1,221 in 2011. The state recorded 982 of the loans for 2012, HUD spokesman Adam Glantz says.

Glantz says the rise could be related to the usefulness of 203(k) loans when it comes to purchases of foreclosed homes, which have been a large part of the housing market in recent years, or the decline in new housing stock, which could make remodeling projects more appealing.

Whatever the cause, Schulz says she is glad to have established herself in a growing market. "I knew the minute I did the first one . . . that 203(k) loans were the loans of the future," she says.


Company. Summit Remodeling Inc. of Wantagh

Owners. Lorraine Schulz and Patrick Tracey

Opened. 2007

Employees. 12

Revenue. $1.7 million

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