Need Advice!

Today I hope to go look at a 4 family for sale. I'm not sure what all I need to ask but I've got it written down someplace. (I need to get organized badly!!!!) I talked to the owner last week and he was out of town. He called me yesterday and said he had answers to my questions about equity and rentals whenever I'm ready so I'll be giving him a call. I think I need to ask for a profit sheet or something. Anyhoo, will post results when I look at it and talk to the owner.

Just in case you didn't get your answers to the other two questions here is what I take from it.

Property #1. HUD handles things differently than most housing authorities, the $2750 to me sounds like it is the estimated ammount of repairs needed to make the repairs needed to the home, esecially with the added line 'property to be conveyed as-is with faults'. They admit the property has issues, though I could be wrong.

Property #2. Lets say that the home's FMV really is $100K and you intend to make $3,000 on the home. Since you estimate repairs to be about $25,000 you would do something like this in the math:

100,000 - (100,000 * 0.30) - 25,000 -- this would give you your sale-price.... take that ammount and take your ammount off, and you get your offer price.

the 6,000 for the RE comission is not needed unless you are paying your agent double what you're getting yourself. I personally won't be using an agent and so I won't have to deal with this one much if at all. Though if you use an agent, I'd see if I can work out to where they get a percentage of the profits and if the buyers don't have an agent (many dont)(on non-cash buyers only), you can connect the two and he can get the percentage from the profit, but also get comission as the acting agent for the buyer.

So in your case on property 2 your sale-price would be: 45,000 (@ 30% off market value) and take another 3,000 off that for your offer, so you would offer 42,000 and sell it for 45,000 for the 3,000 profit. but if you wanted to get a little closer to the pricing of what they want you could go as low as 20% (.20) and come out with 52,000 buy price, and 55,000 sell price.

On the HUD, the REA must be a HUD agent to get through the deal smoothly & quickly. In most cases the Feds are usually accepting 85% of the listed amount on houses, whether it's HUD or Fannie Mae. I have had an offer rejected, then the property goes to auction & bought it for the same amount.(go figure). Since they just dropped 10K, they probably won't go below 29,750;
if that. Also if HUD is the sane as Fannie Mae, you can only make 20% on your purchase price if you sell prior to 90 days. After 90 days you can flip it for any amount. As for the EMD, they would probably require the 2750; we had to put down 2500 on a 20K Fannie Mae house.

Property #2 sounds like a diaster, especially with an addition not finished ... was it permitted, it could come back & bite you in the butt. Also, the in ground pool must be remeadeated. If it is worth 100K afterwards, I as a re-habber would want to sell it for 90K (quick sale)... so I would not pay more than 50K for it, using your figures for repairs etc., therefore for you to wholesale it, buy it at 40 to 45K.

That's what I thought the $2750 was too on the HUD foreclosure. So are you saying since they have (will) escrow $2750 for repairs, that statement "conveyed as is with all faults" means they will not allow for any other repairs that might be found such as CL100 or something their rep did not see and account for? I'm just trying to determine if I would have an escape if something didn't work out. It sounds to me like they are saying $2750 should cover any and all problems/repairs and there would be nothing else considered.

And thank you for showing me the math on the 2nd house. I needed to know if I was figuring it correctly and I was pretty much on the money except for the agent's commission.. I don't understand what you were saying about how he would get paid. Could you explain that a little further?

Well it really depends on if you're using an agent, or if you're not using an agent. Being that I don't have an agent this is all speculation on my part.

But, if you're not using an agent but the seller is he/she is responsible for the agent commission. On the flipside, if you are using an agent giving them a commission on the full purchase price as opposed to the proposed profit ammount (with the math you had) would dramatically lower the ammount you'd offer on a home but if you and your agent work as a team in tandem, on each deal your agent might make less but you'll be able to offer a little more get better acceptance results and in the long-term it would pay off better for both you and the agent you work with.

Again, speculation and perhaps someone who uses an agent can provide a deeper insight into how to figure in your agents pay. That is one of the things that is stopping me from even trying to find an agent, as I just don't know how I can make it lucrative enough for the agent while still getting decent acceptance rates of my offers.

- Justin

My REA told me he was registered to deal with HUD. He just said they were boogers to work with. If I could only get 20% of the purchase price and I purchased it for $29750 (which I can do that), my fee would be $5950. I'd take that all day long but if I waited 3 months, I could probably pick up $15000 and the end buyer would still get a good ROI. Is that what you meant?

The 2nd house really looks good even with that add on which is on the back, but I'm not sure about the permit. The double carport doesn't look great because it's on the front side of the house and you can see the raw beams and rafters and the walls are not finished. Maybe they didn't get a permit. I would have to find out about that too. I was thinking somewhere in the 40s or 50s would be a good offer. All they can do is say no...

Thank you so much. This really helped me.

What you're saying now Justin. No, I don't have an agent. I saw this house while riding by and I called the RE agent listed on the for sale sign. So I don't have to figure in his commission at all. That's what I was not understanding...DUH.. Thank you for explaining.
Shirley

Happy to help where I can, even though you are further along than I am i've read both the books I have a couple times and one i've read 4 times. The last week all i've been doing is research, and more research so i'm learning alot and think i'm just about ready to try and start finding some deals myself!

in terms of house #2, with all the additions and such that have been made it might be a good idea to throw in a contigency on having a structural engineer look at the additions (and the carport) to at least ensure that everything is structurally sound -- although a full home inspection would be better as it'd give you an idea of if those additions are not only structurally sound but also up to at least minimum code standards.

little tip: I think that watching the show 'holmes on homes' and 'holmes inspection' is a good idea, as he goes through peoples homes and fixes them up and points out all the bad things he sees and explains about the minimum code standards and such, which would give you a jump start if you were doing your own walk-thru inspection. ie: looking for cracked foundation, deteriorating brick mortar, signs of water damage, etc....

You need to do a little studying on your offer formula.(#2) If you wholesale it for $67,000 your buyer still has to pay the repairs of $25,000 meaning he/she has $92,000 into it. not a very good deal! Here is a basic wholesaling formula to use. The numbers are not cut in stone, you may pay more in a nice fast selling area or less in a bad area with long DOM averages.

House #2.
ARV $100,000 at 65% = $65,000 minus repairs $25,000 = $40,000 offer price

You bought the property at 65% of ARV. You must subtract the rehab costs when you make your offer to actually purchase at 65% does this make sense?

Wholesale to your buyer for:
ARV at 70% = $70,000 minus repairs $25,000 = $45,000 wholesale price to your buyer. He/she buys at 70% including rehab costs. Now he/she has the 30% of ARV spread. Your fee is $5,000

This is how you present this deal to your buyer:
He/She can sell the property for $100,000
Commissions,closing costs, utilites, cost overruns, 12% = $12,000
Re hab = $25,000
Purchase price = $45,000
Net profit $18,000
A 25% ROI.(depending on out of pocket amounts for insurance, utilities, overruns) This is a good wholesale deal!

Hope this helps!

Michael Mangham
MD Home Acquisitions LLC

What does remedeated mean?? That's a new one on me.

Yes, that does help. That's easier for me to do it that way. So a 25% ROI is good and 30% ARV is good for the investor/end buyer? Okay, that makes sense. I'll have to get that formula written in my brain!! That is good...I love it.

As much as you've been reading and studying, you'll have no trouble getting some deals. I read so much on short sales last night that my eyes are still bloodshot! There is so much information on here that it's impossible to get it all... We just keep trying though, don't we? And thanks again!

I don't think I've ever seen that show. What channel does it come on? I'll try to catch it.. I need all the tips I can get!

i am a REA in IN. your REA might be registered with HUD, but without him having the right attitude, you won't enjoy the deal. i would get another agent who enjoys working with HUD to make offers for me, if i were you. i have found it challenging, yet i enjoy the process because i have had a great HUD REA train me with a great attitude. yes, HUD can be difficult, but so what? anyone can be difficult; it's all about how you handle it. i did a HUD deal last year and it took 3 months to close it and it was all cash. it worked out perfectly and we just went with the flow. in fact, the investor couple i was working with were far more patient than i was. if you get an offer accepted, you cannot back out due to inspection or anything else. if you are going to make the offer, you better have the money to close. period. i have recently heard of HUD taking some very low offers, but that is not the norm. if you want to make offers over and over and take the chance of them not being accepted, then go with low offers. you can always raise them. really depends on what you are wanting to accomplish. HUD inspectors make inspections and estimate repairs, but they are not giving you any money toward repairs and they are usually way off on their assessments. do not take them as written in gold. i would have someone look the house over really well before you make an offer so you know what you are getting into. i'm fortunate that my significant other has been in residential and commercial construction for 38 years, so i take him with me on anything like this. in fact that HUD deal last summer was for a couple of new investors and he looked at almost every house with us and told them what they were looking at. we kind of offer a 2-for-1 when people work with us. remember that totalview, zillow, etc., overprice everything. i have not been pleased with results thus far. someone told me trulia was finally doing better and you would have to check it out, but be careful about getting true comps. your REA should be willing to run comps for you if you are ready to make an offer. just my input; hope it helps some.

We are buying our 2nd HUD home right now it will close here in the next two weeks. HUD only requiers $500 EMD. The $2700 is what someone thinks the repairs will cost to make the house livable. It will cost more for the most part. We have found so far that HUD deals work out esay. But there are always deals that do not work out great no mater what type of a deal it is.

Steve.

I found a home in need of repairs listed at 179000 but I'm offering 140000.FMV is 225000. I want to reside in this home but my credit is around 580 and I can only come up with $1000 down payment.I need ideas on how to get funding.

Thank you. That was very helpful. I felt like that statement "conveyed as is with all faults" meant they would not allow for any other repairs. I'm glad you confirmed that for me. So if, in your experience, their repairs estimate is low, is it even in the ballpark? Do you know if they just include major repairs in that estimate (i.e. heating/air, plumbing, electrical) only? This one might need a roof but my REA has not confirmed the age of it yet. Also, I'm glad to know the $2750 is not the EM. I think you're right about my REA. He seems to stay very busy and doesn't get back to me in a timely manner like I wish he would. I could just go through the listing agent and see how he/she handles it. I just hate to do this since my present REA sent me this foreclosure listing.

I have to get over this fear of having to buy houses myself if I don't have an escape clause to depend on. I don't think I could get a loan right now due to my own mortgage's pre foreclosure status. I'm trying to sell it as a lease option. I did apply for a business line of credit at my bank yesterday and they seemed optimistic that I would get it, but of course, the banker is getting a commission off selling it.... So why wouldn't she sound optimistic???

It's good to know that not all HUD deals are bad deals the way my REA made it sound. I'm a patient person and I don't mind the wait as long as the outcome is good.

Linda, I think my response about repairs should have been directed to Steve and Veronica.

So S & V, if the estimate is to make the house liveable, that would not necessarily include any cosmetic work, such as new paint and carpeting. Is that correct?

Thanks to all.

I forgot to ask. Does the $2750 clause mean they will allow that much or that they have already allowed that much in the asking price? Again, it stated, "FHA insured with escrow $2750". I'm not sure I really understand that statement.

thanks!

Remember that despite REOs being "AS IS", they are subject to home inspection ... so whatever your EMD or the 2750(what Steve said someone may think the repair cost is to make it livable) is; bring a contractor to give a more exact price for the rehab, this way if the cost over runs exceed the numbers Michael's example show, you walk.
As for the 20%; if you paid 29750, you could flip it in less than 90 days &
make the 5950. If you want to try to make more, or rehab it & invest lets say
10K & sell it for 60K, then your profit is around 20K less holding costs.
You just have to run the numbers & do what feels comfortable to you; maybe
3 quick flips to an investor or rehabber @ 5950 is less stressful than 1 that you buy, rehab, then flip yourself for 3 or 4 times the profit but have to hold for more than 3 months. We like doing the rehab work ourselves & selling to an end buyer for more profit, but to each is own.

Gary, I'm confused now. So you're saying that the "as is with all faults" really means nothing and that I can still have it inspected and might have an escape clause. But Linda, who is familiar with HUD deals, said you have no escape once your offer is accepted. Linda, did I understand that correctly?

I agree that there would be more profit in it for me if I hold it and resell, but I don't have anyone to actually do the work for me or with me. I can only do the cosmetic stuff. If I could refinance it immediately, I could; but I think I remember reading that it has to be seasoned 6 months in order to do a finance. I'm not sure if that is exactly correct... I'll have to go back and study that more. I could actually live in it and do the cosmetic stuff myself since I am going to be moving soon anyway. HMMMM... something to think about.

I didn't really accomplish much... wasn't feeling good.. But I did gain some knowledge as usual from this forum. Tomorrow, I'm going to call the agent on the $100,000 house and offer $45. If accepted, I'll get an inspection done and go from there. I'll also try to contact the guy who is selling the 4 family. We played phone tag the past 2 days and the ball was in his court, but that's okay... I'll call him again anyway. I would like to purchase and hold it for residual income but have to do some more studying on that aspect of my REI. I am so ready to get a deal done!!!!!!