House #1 - Post Mortem

I received an email from a local REI who asked if I could talk about the pros/cons about my ordeals with House #1. For privacy sake, I decided not to post his name (M - let me know if it's okay to use your name in the future). I've actually had mental notes about the dealings with this property, and even wrote a little about it in an earlier blog, but I guess I should write down the complete list - not only for my readers to reference, but for ME as well. ;-P

Cons

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1. Inexperience of RE Agent w/HUD - My RE agent had never done a HUD foreclosure, so it was a new experience for both of us. I'll mention in the Pros section one of the benefits this caused. But suffice it to say, her inexperience caused me to sign and resign documents numerous times, and, likewise, having to go by her office several times.

2. $1,000 Earnest Money Check - This was a little bit of a shock, since I was new to the game. I wasn't concerned so much about the dollar amount itself, because if I won a property it would get rolled into the buy costs. The problem was it tied-up my money. since HUD requires a cashier's check or money order, you HAVE to have the cash in reserves. IOW, if you wrote a personal check, you may or may not have the funds available, but you could if your offer was accepted. With a cashier's check (or money order), you HAVE to have the cash avaiable when you get it.

3. HUD's are "AS-IS" - This should be broken down into sub-sections, but I'll try to cram it all in this heading. First, I got lucky that this particular house had very little problems. I only had to repaint, clean, replace a coach light, do minor landscaping, and install a microwave/vent hood. Something I probably failed to mention when I first looked at this house was I NEVER WENT INSIDE BEFORE MAKING AN OFFER. Again, I got lucky - I WON'T do this again. For all I knew the HVAC was hosed, or there was water damage, or a slew of other costly items unforeseen by me. Second, being a HUD foreclosure, the winner gets NO warranties on anything. If the range or water heater goes out the week you buy it - tough luck. Additionally, you get NO manuals/guides/codes for anything: appliances, building specs, security alarm system, HOA documents - nothing. Fourth, HUD never gives you a key to the house. My RE agent had a copy, but she protected it like her first born. The day after I closed, I had to meet her at the property so she could unlock the door for me. The first thing I did was replace ALL the door lock sets, so I alone had access to the property. As I understand it, this is done for ALL HUD houses.

3. Utility Transfer for Inspection - Not sure if this was just my bad luck or if it happens with all HUD properties, but I had to get ALL the utilities transferred to my name in order to inspect the house. The problem with that was none of the utility companies cared that it was just going to be on for just one day. They still required me to put down "activation" fees on top of any usage fees. One (the electric company) even had me pay a disconnect fee. It wasn't huge money, but more of a pain.

4. Gas Company - This was a fiasco I logged here several times. No one knew who serviced the gas for the property. Hindsight being 20/20, I should have just knocked on a neighbors door and asked. I feel this was something my agent should have handled, but I was green and didn't know any better. I finally found out the day of the inspection who the servicer was. Of course, the previous owner still had an unpaid account, so the gas company wouldn't xfer service to me until HUD paid for the account anyway. It turns out I never got the gas system inspected (BIG mistake), and once I became owner, the gas company dealt with HUD directly (IOW, I could get my own account without worrying about paying the previous owner's unpaid balance). If you recall, I was crossing all my fingers and toes when my tenants moved in as this was the first time since last October that the gas was turned on. It turns out I got lucky a second time. Whew! - Never again!

5. Exit Strategy Indecisions - Throughout the beginning, I had it in my head to buy the house, make any necessary repairs, and sell it retail for $15k-$20k. I'd then use that money toward House #2, and so on. Well, as it got closer to closing, I started turning my thoughts more towards the buy-and-hold strategy. This house was in a good neighborhood, had good views, was a nive bread-n-butter rental property, and so on - a perfect property for long-term appreciation. So that led to the tug-of-war: should I hold or should I sell. My wife was already onboard to sell the thing in order to pay off the debts we'd incurred (and were going to incur), but even she began to see the benefits of holding on to the property. So, having no clear-cut exit strategy made us lose focus on getting the place sold (or rented) right away. We settled on doing both, and whatever happened first is what we would go with.

6. Priced Too High - No matter how much my RE agent tried to warn me about our list price, Iwouldn't listen. I ran comps that showed the house had a FMV of $137k, and the place was appreciating at a clip of 2.5%/year. So why not sell it for an even $140k? Problem was I was thinking too technical and too greedy. In a qiuckly appreciating market, this would have probably worked (and then some). Unfortunately, this area wasn't appreciating that much (the 2.5%/yr I quoted was more for tax assessments and not general marketing appreciable rates). so it sat. And sat. And sat. I dropped the price down twice - once to $138k (w/$1k buyer's agent bonus) to $135k. Still nothing. In two months, we only got a total of five showings and no offers. We finally started hitting some paydirt around the beginning of July, but who knows if those interested buyers would have pulled through for our price. It turns out we got a tenant in for $100/mo less than we wanted, but we are still cashflowing positive. Hindsight being 20/20, I should have put it on the market for $129k-$130k, sold it in the first 2-3 weeks, and move on with a nice profit of $10k-$13k. Of course then I wouldn't have the house now, either. Hmmmm.

Next time: The Pros