All Forum Posts by: Greg K.

@Greg H.

The property is in Massachusetts so the process is much lengthier which is why we’re seeing more deed in lieu transactions.

The transfer was directly to the Secretary of HUD, not to the bank.

@Nicholas Anderson

1. HOA is high, if this is a condo. Check to see how much the HOA has in reserves because that might allow you to adjust your capex budget down if they are flush and recent improvements have been made.

2. Insurance is high if this is a condo. Master insurance is covered by the HOA so your "walls in" policy should be less than $300/year.

3. Refi with a traditional bank and your rate should be 4-5%

4. Vacancy seems very high. National average vacancy is 5%. Also that’s a non-cash item so your cash flow will be positive then you might go a month without rent during a turnover.

5. If you target 1% rule these generally work. You're being super conservative on expenses. If this is a BRRRR and you put in new appliance and fix HVAC and plumbing up front, then your capes and maintenance will be less.

6. If this is a condo then you can self-manage since the HOA will cover most of the maintenance for you.

HUD has a form (OMB Approval No. 2502-0589) where they list the rules for letting an owner sell a home prior to foreclosure. If HUD gives you the approval to sell your own, they do an "as is" appraisal and then let you list it for that price for 4 months. The guidelines they provide are in line with @Greg H. and my experience bidding on HUD Homes.  

I wanted to share my experience with a recent HUD Home I purchased to BRRRR. It was a condo, purchased for $185k and the ARV was $250k. There were three comp sales in the complex in the past 6 months so that $250k was apparent.

The rehab cost $20k and the property appraised for $253k.  During the title search for the refi, the bank caught something that I knew all along but didn't think anything of...that the previous owner left a lot of money on the table.

The previous owner signed over the property to HUD in a "deed in lieu of foreclosure" transaction. Basically they agreed to hand over the keys to HUD and HUD agreed to extinguish the debt instead of pursuing the foreclosure. The thing is the mortgage at the time was $135k. Why would you hand over the keys when there was plenty of equity in the property? It was worth $250k with just a light rehab. I could never figure that out.

Anyway, the bank focused on that $50k in equity, the difference between the debt extinguished ($135k) and what I paid ($185k).  Bankruptcy law says that equity could be later be deemed a fraudulent conveyance if the previous owner were to file bankruptcy in the future.  Just imagine you lent that person $25k and they file bankruptcy and can't pay you back.  But then you find out they had $50k in equity in their home that they just walked away from that could have been realized and paid off your loan.  That's what the bank was nervous about.

Luckily the title insurance policy that I purchased when I bought from HUD said they'd cover that scenario if they were to file bankruptcy in the future. So I'm covered but it was a stressful few days while the lender and title insurance company went back and forth.

I'm noticing more HUD Homes are being acquired in this "deed in lieu" transaction as opposed to the traditional foreclosure route. This scenario is likely rare because most of these properties are under water. But I wanted to provide a heads up to other HUD Homes investors...you might want to check if it was acquired in a "deed in lieu" and if there was equity left on the table.

@Greg H. have you come across this or other title issues with HUD Homes?

@Nate Ginsberg Hi Nate, yes sorry I forgot to mention it’s in Grafton.  

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $185,660
Cash invested: $10,000

Condo BRRRR. Purchased from HUD. $20k to rehab with $10k for new gas furnace, AC, and plumbing repairs. Rest cosmetic paint, flooring, appliances, etc. Rented for $1900 within a month of purchase. Appraised for $253k. Cash our refi with local bank who is a portfolio lender within 3 months of purchase. Used HELOC on a primary residence and another investment property to fund the deal. Next time I'll look for private money to help finance the purchase.

What made you interested in investing in this type of deal?

Hit the 1% rule and minimal rehab needed for the BRRRR

How did you find this deal and how did you negotiate it?

HUD home auction

How did you finance this deal?

HELOC on personal residence and HELOC on an investment property. Chase Sapphire Reserve for the rehab costs.

How did you add value to the deal?

New appliances, new paint, new flooring, upgraded furnace and added AC.

What was the outcome?

Rented it out and cash out refined most of my money. After closing costs I have $10k cash invested on a property that appraised for $253k. Monthly cash flow is $300/month and principal paydown is another $300/month.

Lessons learned? Challenges?

I sent 6 photos to a guy in Pakistan on Fiverr who digitally staged them for $25. I had the place listed for rent before the rehab was even complete and it rented in a couple of weeks.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I have a brokerage so I took care of the purchase and rental. I worked with two great attorneys and a phenomenal local bank. All in Worcester County, Massachusetts.

@Greg H. Have you (or anyone else experienced in HUD Homes) noticed seasonality with HUD inventory? In Massachusetts, we're down to 9 listings right now and it's usually 15-20. All but 1 of the 9 are in the Extended period so its stale inventory. Just curious if this tends to happen every year, late summer. Thanks

@Ashley Gish

Same situation here. I'm approaching it by asset-liability matching. I'm just completing my second BRRRR deal. I have $15k in cash equity invested, generating $600 in free cash flow which is auto-paid to the loans. Need two more deals to meet my $1200 month student loan liability.

The leverage with real estate, at lower interest rates than the student loans, plus the longer maturity makes this a positive carry trade. Let the tenants pay off the student loans. Better yet, get Section 8 tenants so the government can pay themselves back.

In addition to a no-smoking clause that mentions marijuana, this is what I use:  The growth, cultivation, and development of any marijuana plants, for medical or recreational use, on the premises is strictly prohibited. Violation of this provision shall be considered a material breach of this Lease Agreement, and grounds for eviction.

I had to pay cash for the property so I used available funds from a HELOC but could have also used a hard money loan. My total cost was $107.5k and then I went to the bank and they gave me a mortgage for $106k so my cash investment after the refinance is $1500.

Normally you buy a home with a mortgage first and put 20-25% down.  Here I bought the home with cash first then got the mortgage second after forcing the property's value higher through the renovation.  

Its a great strategy but it took me about a year of learning about it and analyzing deals before I finally did it.