HUD Home/Plumbing doesn't hold pressure

[Ben Stout]

Hello everyone,

I hope I'm posting this in the right forum. I have found a HUD home I'd like to purchase as a rental. It's a great price, great neighborhood, solid numbers (50/2) etc. Here's the problem:

The HUD disclosure states that the plumbing does not hold pressure. I have seen this on numerous HUD homes. They often don't do what I'd call "the best" inspections, if you know what I mean, but this is especially disconcerting because the home sits on a slab foundation. If I inspect and then back out, HUD wants $500. Having a diagnostic run will probably set me back an additional $300-400 to find out what the problem is (I'm guessing.) I could essentially be flushing $1000 if it turns bad.

Could be a toilet seal, could be a pipe busted under the slab. For this house they would have used PVC and it was built in '89 (Ranch style.) In my offer I've budgeted $2000 for a repair. It could be way high or way low. What would you do in this situation as an investor? Go for it, or look for the next one?

Thanks!
Ben

[Jon Holdman]

I view this as a gambling puzzle. Not as in investing is like gambling (though it is, in many ways). Rather, you are making a decision with incomplete information. So, you have to consider the range of outcomes, their cost, and their probability. This could be as simple as a bad faucet. That's a $30 DIY repair. Or, as you say, it could be a broken pipe under the slab. Even that is a few hundred if you DIY it, perhaps more if you pay someone. The hard part will be finding the leak in that case. But the simplest test is going to be to turn on the water and see where it starts gushing. Messy, but usually effective.

So, I would consider the possible outcomes and the probability of each and do the math to come up with an expected value for the cost of the repair. I think your $2000 is a far worst case value. I'd expect you could fix almost anything for $2000, even a break under the slab. If you can use that value and still get the house great. But I'd probably use a few hundred. If it turns out to be $30 (good chance, IMHO, since leaky faucets are almost a given), great. If it turns out to be a broken pipe in a wall or ceiling (likely here where we have freezing to worry about), then a few hundred is about right for the plumbing and sheetrock. If its something more major, then you came out on the bad side of your bet. It happens. Hopefully you have enough of the $30 repairs to make up for the $1000 one.