Warning for people looking to house-hack through FHA!

[Sterling Fields]

First and foremost I am not saying that going FHA is a bad idea. In truth, the ability that a FHA loan provides to leverage properties for first time homebuyers is pretty incredible. However, this a warning for people trying to jump in their first deal using this vehicle.

 I found BiggerPockets not long ago and it became so clear to me that rental properties and real estate were the way for my wife and I to achieve financial freedom. We decided to house-hack for our first deal and this is the story of how that deal did not work out.

Numerous podcasts and books later we were actually looking for our first house-hack (btw, the idea is genius and I don't understand why everyone just starting on their financial freedom journey doesn't take this path, but that is another discussion for another day).  After hours, days, and weeks of looking through deals and walking houses with realtors, we finally found a duplex that was in our price range and also in a great area of town.

It was built in 1951 and had never been updated so it needed a fair amount of work. I am a contractor and grew up working construction so this property looked like GOLD to me. Not only were we going to house-hack with only 3.5% down, we were going to get some of that awesome "forced appreciation" and raise rents in the process. Win-Win

After some heavy negotiation our offer was accepted at $15k below list price with the sellers splitting the closing costs. During the due diligence we discovered there was more work than originally anticipated.  We came back and asked for another $3k towards closing and they accepted! My analysis projected that once we moved out, the property was going to cash flow over $400 a month and have a decent equity position. Man were we excited ..... and then everything fell through.. 

As many of you know getting a loan from a bank, especially FHA, is like pulling teeth. We jumped through a hundred hoops throughout the process. After due diligence the bank kept postponing the closing due to the appraiser, underwriting, etc. (four weeks in fact). A few days before the 4th closing date we get a call from the lender, short and not so sweet. "We are denying the loan, and we still need you to pay for the appraisal ($950)." Between the appraisal, elevation certificate (it was in a flood zone), and inspections we are out over $1,600 and three months of our time.

According to the bank, FHA would not back the loan because there were not enough comparable sales of "duplexes" in that area within the last 12 months to justify the appraisal. I called 10 other banks/mortgage brokers and they all said the same thing, "We need comparable sales."

Warning for people looking to house-hack through FHA! Verify with your realtor that there will be enough comparable sales of "similar" properties  in that area within the last twelve months before you spend the money and time going through this whole process!

Needless to say our goal remains the same and we will persist to be successful in real estate. This is just a lesson learned.

Does anyone have any suggestions on what to do in this situation or any other ways to avoid it? -The owners would not do seller financing with such a low down-payment.                                          

-My agent provided other duplex sales, but they were sold in packages and could not be used.

-Conventional requires 15% for 2-4 units 

p.s. go easy fellow BP members, this is my first post and I am not a writer.

Sincerely,

Sterling Fields