Why Is this House Available?

Question

I went to see a house with a Realtor yesterday. He works with a number of investors I understand. The property has been on the MLS as a HUD home for 45 days. It's a real dump - going for $20k. He believes that it would take probably $30k to rehab it. The possibility of getting a family in there using a Section 8 voucher for $800 a month is good - well except for the fact that Section 8 is currently having budget difficulties. But suffice it to say, it's a good deal. What are some thoughts on why it hasn't been taken yet?  I hear that this is the kind of marketplace where investors clamor to get certain houses - multiple offers, crowded foreclosure sales, etc. I think there is money in this house, though probably four months out, so I am a little intimidated that no one else seems to have thought so too... What are your ideas on why?

Jason Merchey · Answer

Nice info Mike H.
I think it may have something to do with appraising/LTV/ARV and such. I was thinking of doing all-cash, and holding, and as I mentioned, it's a Sec 8 neighborhood, so perhaps I was so focused on cash flow that I didn't think carefully about those things. That or folks being wary of Section 8 since it froze its numbers where they are at (e.g., no new vouchers being issued until further notice). OK I'm getting a clearer picture, thanks everyone

Mike H. · Answer

Is the house listed for 20k or is that what HUD is countering with? If its listed for 20k, you can probably pick it up for 15k.

Two other comments/questions though.
1) You should always know what the house is going to be worth before you buy it.  If you do buy it for 15k and put in 35k, that means you've spent 50k. Can you buy houses already in good condition for 40k in the same area? If so, then you'd want to do that.

You don't want to take the risk of doing a significant rehab if you're going to be all in at retail?

2) That being said, don't worry that other investors have not picked that house up. If its a deal to you, its a deal. Maybe the other investors don't want to deal with that area. Maybe they don't want to buy a 60k house for 50k (50k if you include rehab).  Maybe they don't think they could flip that deal and thats all they do is flip.

I see some of the things when I buy because my realtor also works with a couple other investors. They won't do some of the deals I've felt I've stolen because they aren't good flips and these guys only flip.

I'm also all about the cash flow. But I need the LTV numbers to come in right so I can avoid having to put a bunch of my own money into the deals. If the house doesn't appraise out at 70% LTV, I'm coming out of pocket and thats a problem.

But in this case, I wouldn't care at all that nobody else is seeing this deal if you like the numbers. And the other interesting comment is that I actually love these houses that need complete rehabs. There's risk sure, but when you get to spend that much on rehab, you end up having a house in almost new construction condition.

I've done two of these where I got the house for a song and spent about 30 to 40k in rehab on each. They're fantastic rentals. Everything is brand new. New flooring throughout, new kitchens, new hvacs, new water heaters, new roofs, new windows (well, one got new windows the other didn't need them).  There's nothing left for me to do unless something goes wrong with the bathrooms because that was the only thing that didn't need to be redone.....

But the houses are literally near new condition and I've only one had to pay for one significant repair on one of the house (the new roof leaked on one of them!).

Wayne Brooks · Answer

If You miss Your rehab estimate by 20%, you're normal.  I would never expect the realtor to be within 20%, that's not his job/area of expertise.

Jason Merchey · Answer

It probably wouldn't be as good of a deal if the tenant paid 100% out of pocket. So yah, that congress-based-guess is a good one. And as you say, he might be undershooting. however, it is bad for our budding relationship to do that, because at a $20k sale price, he would be more incentivized to make me happy as a long-term client who could utilize his firm's property management or construction project management services, and if he missed his estimate by 20% I wouldn't think as much of him.

Bill Gulley · Answer

No idea, but there is probably a reason, I assume the ocation passes muster, then how accurate is the Realtor's guess? I mean, the Realtor is trying to sell it. Probably a low guesstimate.

If it's a Sec 8 area, landlords may be holding thier nose until the congress gets off thier tails. How would it do without Sec 8? :)

Jason Merchey · Answer

Hi
The ARV is perhaps the issue..... I don't know what that is at this point, because it isn't my main concern. My main concern is cash flow, and it flows impressively. Assuming that Section 8 is viable though, I suppose.
Not sure at this point about your second question.

Mark Ferguson · Answer

What's ARV?  It's hard to know why it's still on the market without more details.  Was it under contract before and came back on the market or has it even active all 45 days?