Tell me why this is a bad idea

[Jason Pachomski]

Disclaimer: I'm still pretty new to all this...

So, I've been reading up on HUD and how the properties that it sells work for investors. I had a thought that seems pretty simple (which makes me immediately think that I'm missing something).

A hypothetical scenario: Let's say I find a SFR on the homestore site that I want to make an offer on. I do my math and figure my offer price based on ARV and an intentionally inflated repair estimate (seeing as I haven't seen the inside in person). Now, let's also say that I have almost none of my own money to use -- I could pay the $1000 earnest money deposit out of pocket though.

So if my offer gets accepted is there anything wrong with taking out a hard money loan for the purchase price and repairs, then retailing the house once the rehab is done? I mean, it's all about the numbers right?

If I could find a deal that was discounted enough for me to be able to afford the 14% plus 6 points the lender will charge me, plus cost to sell, and still walk away with a profit, is there anything wrong with that? Are there factors I'm not considering? The way I see it, the biggest hurdle -- and maybe an insurmountable one -- is going to be finding a deal that's discounted enough for the numbers to work.

What do you think?

Thanks in advance!

(PS. I've also been considering the same scenario I described above, except instead of HUD I'd be buying from wholesalers.

[Joe Villeneuve]

@Jason Pachomski 2 things.

First:  Never overestimate your analysis.  Why would you?  The deal either works or it doesn't based on your offer and the assumed rehab.  If, after you win the bid, and you inspect the property,  it doesn't, you pass on it.  If you overestimate, and you didn't need to, and the deal doesn't work with the overestimate...but would have with the actual numbers, you just screwed yourself out a good deal.  If the deal doesn't work after inspection due to higher rehab costs, then you back out during your inspection period.  You don't need to overestimate the rehab at analysis.

Second: HML isn't a loan, in the same sense as a mortgage. A mortgage stays with the house and effects your CF. The HML is dumped with the mortgage and should be thought of as another cost of rehab...like a floor, kitchen, doors, etc... How much of a cost depends on how long the rehab will take. Estimate the length/time of rehab, factor in the interest payments for that many months (here is where you need to add in a month or 2 to be safe), and if the numbers still work with the HML cost included in your rehab cost, then you're good to go. If not,....you're still good to go. To a different deal,