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Flip This House
Investing in HUD Foreclosures
Buying a Home After Foreclosure
This is part of a series on Foreclosures and house flipping. The first part can be found on the flip this house page.
HUD foreclosures can offer a great investing real estate opportunity. But how do you know you are getting a good deal when buying a foreclosure?
If you are buying a home after foreclosure, as an investor you have to protect yourself by doing your due diligence and making sure that the property comes with a deep enough discount. This will protect you from the risks associated with the unknowns of a government foreclosure. Plus, you want a discount that will give you a good profit because after all this is an investment.
To determine that you are going to need these four key pieces of information:
1. The value of the property – what is this property worth if it was all fixed up and you were going to sell it right now.
2. The cost of repairs and/or upgrades – a combination of things you have to do and things you could do to make it more attractive.
3. Other associated costs – closing costs, inspection fees, agent commissions, advertising, etc.
4. The exit strategy – what are you going to do with this house? i.e. fix it and sell it (flip it), rent it, lease purchase, sell to another investor, etc.
Determining these four pieces are core investor skills. They are learned through education in real estate investing
and honed by experience.
Estimating Value of HUD Foreclosures
HUD foreclosures have the benefit that HUD does an initial inspection of the house where they check out the major systems and they put together a property inspection report that can help you estimating repairs.
I made a quick list of the repairs needed and what improvements could be made to the house. I did research on the cost of repairs and based on my experience I calculated that the total repair bill could be anywhere between $23,000 to $30,000.
I then went to work on trying to find out what this house would be worth once it was fixed up. In order to do that I considered these important pieces of information:
- HUD did an appraisal, by a certified appraiser, showing the value of the house in it’s current (messed up) condition to be $105,000.
- The county tax records had the house appraised at $158,000
- There were three properties nearby up for sale ranging from $140,000 to $155,000 and none of these had a full basement like the house I was considering.
- My agent provided me with a list of recently sold properties nearby. It showed that in the previous 6-8 months similar houses had sold in the $134,000 to $160,000 range. However I took this with a grain of salt because we where in the middle of a declining market (January-February 2009) with plenty of atlanta foreclosures.
- By talking with the neighbors I found out that the previous occupant of the house I was considering was paying $1,200 per month for rent. The neighbor I was talking to was paying $1,100 on his house which was smaller. That rent range usually belongs to houses worth upwards of $150,000.
I concluded the after repair or market value for this house could be $140 to $160k. That of course was dependent on the amount and quality of repairs AND what upgrades I could do to it in the process.
So…was this a good potential investment?
In order to answer that I need to give you one more vital piece of information: the purchase price. What if I tell you that I can buy it for $60,000, would you think it would be a good investment? Let’s see…
Purchase price: $60,000
Repairs and upgrades: $30,000
Other Costs: $5,000
Total Invested: $95,000
After Repair value: $140,000 (conservative)
WE GOT A DEAL!!!
HUD Foreclosures: the Bid Process
The condensed bid process for HUD foreclosures is like this:
- First of all you must use a broker or agent who is registered with HUD to place a bid on a property.
- The house is put on the market and only offered for bidding to owner occupants for a certain period. The length of this period can vary by state. An investor can make an offer during this period but an owner occupant offer will have priority.
- If there are no bids during this period then it is offered to the general public including investors. In the event of competing bids HUD will favor owner occupants.
- If there are no bids after a certain period of time HUD will lower the price of the home by 10%, no exceptions. This is an automatic formula that HUD uses regardless of what is happening in the market.
- If property does not sell HUD will keep on lowering the price by 10% at a time until it sells.
- Here is the key point: You can actually bid less than what HUD is asking, up to a certain point, and HUD will accept your offer. The key is figuring out what is that minimum that they will accept, which my agent helped me figure out.
The HUD asking price for this house was $79,800, I put in a bid offer of $60,501 and within 24 hours I got a call back saying the house was mine!
I then had to give a $1,000 earnest money check and wait for HUD to set a closing date.
HUD Foreclosures Exit Strategy: Flip This House
After some due diligence and more detailed calculations than shown above the numbers were showing that we had a good deal on our hands. The question then was what to do with it? - meaning what would my exit strategy be.
Should I fix it up and rent it and probably cash flow about $300+ per month or should I try to flip this house and cash-in now?
It basically came down to the fact that the house was more than a 30 minute drive for me so as a rental it would make it harder for me to keep up with. Plus, choosing to flip this house would provide me the opportunity to learn by doing. It would be my education in house flipping – a sector of real estate investing that can be very profitable.
I have shown you how to buy HUD foreclosures and what to do when buying a home after foreclosure. This was the easy part. In the next article I will take you through the steps of fixing it up. Now the work begins…
NEXT: How To Flip Houses - Creating The Scope Of Work
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