Written by I spoke to my mortgage broker and it was beginning to feel like too much of a hassle to get a loan for this house. I was only planning to borrow about $50,000 and that by itself created a problem. As a percentage, closing costs (including origination fees) looked huge. Is it worth paying $3000+ to borrow $50,000? Then, as I mentioned before, it would likely be a struggle to get the loan since the house lacked a stove and flooring even though I had plans to install new flooring and appliances (those stupid habitability rules!). In the end, I just killed the entire loan process and pulled the application. I will scrounge up enough money and just pay cash. It ends up being so much easier and I don’t have to worry about the disproportionate fees and headaches. As they say, cash is king.
Waiting on the loan
I just got word from my mortgage broker that he submitted my loan application. Honestly this should have been done at least a week ago but apparently he had a problem getting accurate escrow fees into the documentation. That is easily one week lost due to poor flow of information and it could cost me thank to the HUD per diem penalty.
I am a bit concerned about getting the loan. My understanding is that some loans (like FHA) won’t finance without basic necessities (like flooring or a stove). I understand what they’re trying to do there, but since this is an investment home where I will be installing all new flooring, a new oven and stove, a new dishwasher, and just about everything else, it would be silly for them not to grant the loan. But we all know that the rules in real estate transactions don’t always make the most sense. I’ll let you know how it goes.
Next door
I didn’t think that it was worth mentioning before, but the house next door to the one I am buying is also for sale (it’s an REO / foreclosure). List price was $79,900. While it may be worth that price, it wasn’t a screaming good deal and there were others at that price that were more compelling. However, I just saw that the price was dropped to $59,900 — a reduction of $20 grand! At that price, this house is a steal! It is the exact same model as mine but the previous owners did a bunch of work to it. It has newer vinyl windows, granite counter tops, and what was once a patio is now an enclosed room. I would have surely paid $60k for this house if I had the opportunity when I first saw it. Instead, I told my buddy about it (the same one who taught me everything I know). He usually prefers to buy houses on larger lots, but he’s smart enough to recognize a good deal when he sees one. If he ends up buying this house, we would in effect be neighbors. There are some possible synergies that go along with that. If I ever needed to visit my tenants, I could take a look at his house too. If his tenants ever told him that their neighbors (my tenants) were causing problems, I would know immediately. This could be interesting.
Also, I just sent over all of the documentation to accompany the mortgage application for my next house. My lender should be submitting it as soon as he gets the escrow fees from the escrow company. Apparently they aren’t moving very fast. Normally I wouldn’t bee too concerned, but HUD has a per diem (daily) penalty that they assess for every day the escrow runs longer than what is on the contract. At $25/day (check it out, page 2), any delay can turn into a costly nightmare. I’m hoping we can get past this quickly.
Get your heat on!
The heater contractor inspected the heater today. There’s bad news and good news. The bad news is that the problem is significant. The good news is that the unit is under warranty. The warranty covers the necessary parts but not the labor. Said labor will cost about $75; but since the $65 I paid for the inspection is applicable to future repairs, another $10 should cover it. I’m happy with that.
Now I need to call all of the utility companies so they can turn off all of the utilities. Remember HUD rules: you have to shut everything off pretty quickly after turning them off. You don’t want to break any HUD rules now… no no no… they may cancel escrow on you!
Now is also the time to tell my mortgage broker that there is nothing on the inspection that concerns me enough to want to cancel escrow. As far as I can tell, based on what I know today, I want this house.
Scrambling
Not sure if I mentioned it before, but another one of HUD’s ridiculous requirements is to turn off all utilities within 48 hours of turning them on. I scrambled last week to turn on all of the utilities before the inspection since it didn’t make much sense to inspect a home without any power or water. Fortunately we were able to get everything turned on in time.
Now, since I need to get the heater checked out, and since I need to request that utilities be turned off by Tuesday night, I need to get someone out there ASAP. I just made a few calls and I found someone who could get out there tomorrow to look at it. They charge $65 for the inspection fee but not much I can do there. Basically one of two things will happen: 1) the heater works fine or 2) it doesn’t. If it doesn’t work and it needs significant repairs, then I am back to considering whether or not I want to cancel escrow.
I also just sent a copy of my (beware it’s 96 pages) inspection report to my handyman along with a full list of everything that needs to be done to rehab the property. I want to get his professional opinion about what it might cost to repair & replace everything.
Judgement Day
Well, ‘inspection day’ to be more precise. I went to the house today to meet my inspector (licensed of course), my agent, and my handyman. To this point, the only people from my team to see the property have been my agent and I. As you know if you’ve seen my earlier posts, I firmly believe you should always have your properties inspected by professional inspectors as they will look for, and ultimately find, things that you don’t. At the same time, I wanted my handyman to look at the place to get an idea of the work that needed to be done and generate possible ideas for an inexpensive rehab.
Arriving at the house, I noticed that the inspectors were already there and they had the garage door open. Unfortunately, it looks like someone tried to open the garage door before removing the padlock so the automatic garage door opener nearly tore out the top crossbeam on the door. If I do end up buying the house, there goes another handful of money that I will need to spend to repair or replace the door.
While in the garage, I noticed that the water heater was dripping water and it seems clear that I will want to get a new water heater for any future tenants.
Since the house did not have a thermostat installed, I brought one with me (a cheap unit from Home Depot) so we could test the heating and air. After hooking it up, we were able to get the AC unit blowing cold air but we couldn’t get the heater working. I’m not sure if there was a problem with the heating unit, the gas supply, or my hooking the thermostat up incorrectly. Whatever the case, I want to make sure to get an HVAC company out there to see if the heater ultimately works. As you will recall from my first rental purchase, the AC did not work and I only found that out AFTER the tenants moved in and tried to use it on a 100+ degree day. I won’t ever buy another home unless I know for sure, one way or another, if the HVAC system works or not.
Today’s was a short visit and I got a few ideas from my handyman on how to handle a few things. All in all, I still feel comfortable with the purchase. The only things we saw today that I didn’t already budget for were: 1) the need for a new water heater and 2) the need to repair the garage door. I’ll post a link to the property report as soon as I get it.
The next step for me is to scrutinize the inspection report to see if there is anything the inspector found that I didn’t. From my prior visit, I already have a very good list of everything I need to do and I have budgeted accordingly. If the inspector found anything significant that needs repairs or replacement, I may need to cancel escrow. At some point, it just doesn’t make financial sense to buy a property and spend money on repairs. We shall soon see.
Here we go again
My agent just called and our latest offer of $70,000 was accepted. So we’re back in escrow again but at a $6500 discount! Let the games begin… again.
Be smarter than your government
Just out of curiosity, I looked on the HUD Homestore site this afternoon and noticed that the house I was chasing was listed for sale again, and just like last time, it was not listed on the MLS. Since I had the house locked up for the last few days, I knew it was highly unlikely that anyone knew the house was for sale again. It was mine to buy if I wanted it so I decided to submit another offer on it… but this time I was going to submit an offer that made financial sense based on the potential rehab cost. Last time, I offered $76,500. This time, I am offering $70,000. With a $6500 discount, this house becomes much more attractive. My financial model tells me that I need to get this house for less than $95,000 and the revised price should put me at about $90,000 ($70,000 price and ~$20,000 rehab costs). Now THAT is a deal. I phoned my agent about 20 minutes ago and he said that he would submit the offer before the close of business.
Lesson of the day: Just because you fall out of escrow doesn’t mean that you have to walk away. If you want to buy a home, keep at it. You never know what might happen. In those cases when you are dealing with HUD, you have to be smarter than they are, or at least craftier.
Escrow Canceled!
As I mentioned before, HUD has very rigid rules. If you don’t follow them, you risk getting bounced out of escrow. That’s what just happened to me. As I said in my prior post, the house just barely made financial sense to buy based on the necessary rehab costs. While I was still interested, I wasn’t thrilled about this house but I asked my agent to move forward with the paperwork and continue with escrow. After I looked at the house on Saturday, my agent sent my signed contract back to HUD via overnight mail as they needed to get it by Wednesday morning (Monday was a holiday so we couldn’t get it to them by Tuesday). Per the tracking information, HUD received my package at 9:34AM this morning. At about 10:15AM, my agent called them to confirm that everything was still moving forward and they told him that they had just canceled escrow about 2 minutes prior. When asked why, they said that they had not received the paperwork on time. My agent told then to look at their morning mail as our contract got there in the first delivery. They put him on hold, went to check, and they DID find the contract. But, for whatever reason (system limitations, laziness, I’m not sure), they said that they could not reinstate the contract. We had fallen out of escrow. While I was disappointed for a minute, I reminded myself that the rehab costs made this deal less attractive than initially thought and I knew I could probably find a better deal. There are always more fish in the sea.
Lesson of the day: if you are buying a HUD house, be prepared to jump thorough hoops as you try to abide by their rules. Don’t be surprised if your escrow is canceled even if you DO follow the rules (as mine was). HUD makes their own rules and you are forced to play by those rukesl if you want to play their game.
Summing it up
Based on everything I’ve seen, this house might require about $19,000 worth of repairs and improvements before I can put a tenant in it. Honestly, when I consider the cost of the house ($76,500) and $19,000 in rehab costs, that’s more than I would like to spend. My financial model tells me that I can probably ask for $975 rent on this house and, based on that, my total cost of this house needs to stay below $95,000. While I am still interested in purchasing this house, I’m not completely in love with it based on these numbers. That having been said, I tell my agent to go ahead and proceed with the paperwork.
