Lesson learned from My First Deal. What could I have done?

Question

I just closed on my first buy and hold deal, a HUD foreclosure. The closing process was way different from when I closed on my personal residence. I was hoping this HUD foreclosure process would be similar to that and hoping my lawyer/agent would guide me through the process, I was wrong. Below are the things that went wrong during the transaction. WHAT CAN I DO IN FUTURE TO PREVENT THESE.

1) HUD only allow 3 days for utility turn on. I told my bank and agent to notify me when appraiser is coming so I can schedule inspection, appraiser, and 3day utility turn on period at the same time. Bank and/or my agent didn't communicate with the appraiser. Utilities weren't turned on for the appraiser, thereby, costing me additional appraisal cost for re-inspection.

2) Bank said they would do "As-Is" appraisal but appraisal report came back as "Subject To". It took a month for the bank to successfully appeal the appraisal thereby extending the closing date. This cost me another $$$ because HUD charges money per day for extending closing date.

3) I was hoping the seller would pay for buyer's title insurance but I was wrong and my agent didn't educate my on HUD deal. Closing company wanted to charge $500 for lender's title and $1,500 for buyer's title on a $85k property. Title search came out clean so I told my lawyer that I don't want to buy buyer's title insurance. Lawyer spoke to title company. He said the title company wouldn't do business with me if I refuse to buy buyer's title insurance.  Since there is a single lawyer involved in a HUD deal, title insurance is how he get paid. They offered a $500 discount. Forcing me to buy an optional buyer's insurance still doesn't sound right to me. I bought both title insurance.

4) HUD doesn't accept electronic documents. They want us to mail the signed contract and all documentations within 3 days after accepting our offer.  They rejected our first package because signature was missing on a page. The agent made me pay for the mailing fee for both packages costing about $100. He said his commission only cover electronic documents. Is that right?

5) HUD also doesn't care about city inspection, it is buyer's responsibility. No one took ownership of this task so I had to walk into city's office to schedule the pre-purchase inspection and final inspection. This cost me about $400. I know I have to pay the inspection fee but who is usually responsible for coordinating city inspection. How do people buying out of town handle this?

6) My agent wasn't really familiar with the particular area as we were making offers all around Chicago land area. Chicago land area is too big for a single agent to be familiar with all neighborhood and suburbs. We lost out on 5 deals in areas he was familiar with. I kind of felt bad for the agent for all the work he had done so I stuck with him in order to pay for all his troubles. Do investors have multiple agents in different areas?

I learned a lot from this transaction and I considered those additional cost as tuition  for "Real Estate Investor 101" class. However, what can I do in the future to avoid similar troubles?

Greg H. · Answer

1.  This is the reason many HUD properties do not close and I end up purchasing them for cash.  Only work with a lender experience with doing loans on HUD properties as there is no work around on HUD's end

2.  Same as 1. Only work with lenders who can do as-is as HUD will not allow any repairs prior to closing.  It is actually a federal crime to alter a HUD property

3.  HUD no longer allows allows investors to put closing costs in their bids so the buyers is responsible for all closing costs.  I use 1 title company to close all of mine in Texas and negotiated a flat fee

4.  Many of HUD's Asset managers are now allows digital signatures however the agent still has to overnight the earnest money.  As a broker, I have never charged a buyer for me to properly conduct business

5.  Hud does not pay any city inspection fees or utility connections

6.  Once an Agent has an NAID number they are eligible to place bids throughout the state

Brie Schmidt · Answer

1.  Your agent would not have known when it was being scheduled, but your bank would.  Work with a better bank next time that is on top of things

2. Banks cannot choose the appraiser or  control what the appraiser does, this is something you can't control

3. Sellers never pay for buyer's title, and in foreclosures buyer's usually pay some of the seller's closing fees. There is a usual and customary breakdown and anything outside that needs to be agreed upon in writing.  Why was there only 1 lawyer?  I would never use the seller's lawyer and would always hire my own.

4. They never accept electronic documents.  Your agent probably should have reviewed them before you sent them but you are the one who missed a signature

5. This is your responsibility as the buyer, you are purchasing it and buying it subject to city violations unless otherwise agreed upon in writing

6. I am an agent and I only work in a specific area of Chicago, I would never take on clients outside of my area of expertise.  Some of my clients have other agents in areas I don't do and I am totally ok with that.  They are always upfront with me and I will even refer them to someone if I have a good contact in that market.

Brie Schmidt · Answer

1&2) As a buyer's agent, the appraiser is never in contact with me.  I have no idea when the appraisal is unless the bank or listing agent tells me.

3) Your lawyer should have set the expectation for you, but you are going to pay title fees regardless

4) You pay all costs associated with the purchase.  Commissions don't cover surveys, inspection, lender fees, or fees needed to acquire the property.  That is all a buyer's expense

5) you would need to hire someone, as the agent I may need to be present to give access, but it is the buyer's job to handle it.  I had a client buying a foreclosure and doing a 203k and needed a contractor walk through, about a hour before his wife had to go to the ER and I went on his behalf.  I didn't think twice about it.  But when my client's do these transactions they arrange all the contractors and I let them in the house

Jay Thomas · Answer

Thanks Brie:

1 & 2) I am definitely shopping for a new bank. Bank said agent should have communicated the the appraiser prior to granting him access to the property....The property only need $5000 of cosmetic repair. Bank said they would finance it and would only do a "As-Is" appraisal. It became a drama when the appraisal report came back as "Subject To" utility turn on and $3000 cosmetic fix.

3) The lawyer is my lawyer. HUD uses "Buyer Select Closing Agent Pilot Program," which transfers the responsibility for many of the functions traditionally performed by the seller's attorney in Illinois, from HUD's designated counsel to the "Closing Agent."

4) Is it normal to pay agents outside of the commission? The missing signature is from both sides.

5) How will I handle this if I'm buying out of town?

Sam Shueh · Answer

On HUD, distressed properties I suggest cash, Heloc, revolving etc to get around appraisal, inspection, defects.

Title-regardless of the nature unless you want to bypass(later they will charge you still) you buy insurance.

Wet signatures only with HUD, 99% distressed properties.

Agent- I don't think your agent is at fault that you missed out. Your offer contract was not attractive to sellers. In our area, all regular sales buyers get offer accepted 100% have no contingency,14-21 day with a loan or 7 days w/o a mortgage. Selling price is not the only consideration with sellers. Not agents even want to be in distressed properties. HUD is an unique area and agents with HUD credential and recent experience is whom you want to work with.

Lesson learned from My First Deal. What could I have done?

Most Popular Reply