Posted by Rob FL on January 29, 2002 at 18:53:36:
I think my bottom line point is when dealing with the feds, don’t play games with them. They have basically unlimited monetary resources and can if they want to make your life very miserable. The lawyers they can afford to hire are probably a lot better than the ones most investors can afford to hire.
Dumb Mistake of the Day. Please Help!! - Posted by John Buck
Posted by John Buck on January 29, 2002 at 11:15:59:
I recently did a dumb thing. See, John Doe, you’re not alone. I bid on a property during a HUD Auction. I lost the bid, then resubmitted another bid more than I wanted to. But, I figured I had a little cushion. I was awarded the bid.
Now, I take full responsibility for the purchase. I didn’t do my due diligence. And for that I completely recognize I’m at fault. I was in the process of buying a few different properties, and didn’t complete my homework on this one. I’m just trying to make my lemons into lemonade.
The property is a very attractive house in a decent neighborhood. Has excellent curb appeal. Very attractively laid out, newer home. It needs a new roof and a few other minor repairs. I know I can get the repairs done for around $3k. I purchased for around $51k(I originally bid 45k). The problem was I screwed up my CMA. I thought I could market the property for around $70-80k. Now, it turns out it’s probably closer to 60-65k. Possibly could get 70k, but doubtful. And no way it will pull 80k. My plan was to rehab using a private investor and then sell it. Well, I now know that no private investor would touch it. And I don’t think I would want them to. I sure wouldn’t advise them to.
Now, I never actually signed an agreement on this property to purchase this home. I had bid on another home from this same company and they just used my old contracts to make the bid on this one. Also they have a personal check for $500, but the actual required cashier’s check for the revised bid would be $1,000. Now, I know there is a way here to get out of this deal and not lose my $1,000 or my $500. But, I don’t know if I want to pursue this plan of action. I think they would have a way to retract the bid so as to protect my earnest money deposit. And the only one who would be out would be the HUD. But, this was a bid as an investor and the rules are quite clear that it is very difficult to receive your money back as an investor.
My original purpose was to rehab and sell retail. I just don’t know if this is going to be possible. I would most likely lose money after closing two loans(I elected not to have the HUD pay my closing costs). So, this is out.
Option two is to purchase/rehab and sell on a Land Contract. I think this might be the best deal. I will have to come up with about 8,000 cash, which I could possibly do, but it will be really, really tight. I should have around 6k within the month, so I know I could scrounge for the other 2k. I could then recoup most of my closing costs and rehab costs with the land contract, and develop a decent cash flow(around 300+ a month). Unfortunately I don’t think I would have the available cash to repair and close on it. So, I’d have to find some way to do the repairs myself. I have reroofed a house before, it’s not much fun though, and not what I think I should be doing.
Option Three is to purchase/rehab and do a L/O on it. Problem is I get less cash up front, and am way out of pocket on this one. I could get decent cash flow, and hopefully a decent pay day on the back end.
Option Four is to do either of the above and get a partner. I mean I’m still getting a fair deal. Probably buying it at 85% of FMV. Have them put up the up front cash. And we split the profits fifty/fifty. I have investors I know that have the cash and could do it. I do have a track record, I have bought and sold a dozen or two homes. I just messed this one up.
Option Five is to just add it to my long term properties. I could make this a rental and probably clear a few hundred a month on it. Once again it would suck every available penny I have as cash.
Option Six is to just pay the $1,000 and never close. Take it as an expensive seminar.
Part of my problem is that I’m cash shy at the moment. I’m closing on a flip that I’m making $5k on in a week. So, that helps, but I’m trying to build a cash reserve as I had a few disastrous repairs on some rentals, and am wallowing in about 40k of short term debt(more than half of which is sunk in another rehab that is almost completed). I am leery of doing option two or three because of my short cash reserves. This property was going to help me get a more comfortable cushion.
Also, I should mention I don’t want to burn my bridge with the broker as I have another deal with a partner that should net in the 30k range. But, that’s still 6 months away and doesn’t help me now.
Any advice from the more experienced investors would be helpful. Yes, I know I messed up. I say it again, I take full responsibility. I’m not scared of that. I will do what it takes, and I wish to act ethically and correctly. I don’t think there is no hope for success here. I’m just trying to determine the best route.
John Buck
What’s the problem? - Posted by GL(ON)
Posted by GL(ON) on January 30, 2002 at 20:05:36:
May I suggest, you sell or LO the property as is? Do a quick clean up. Put an ad in the paper" Bargain, must sell quick, owner will finance, rent to own" or whatever will draw the best response. Sell for what you can get. YOu say FMV fixed up is $70K to $80K and it needs $3K in work, but has great curb appeal. So sell or lease option for $70K. If you have to you could go to $65K, or $60K and make enough for a quick deal. YOu could even go $55K and still make a little if you sell quick.
Meditation is good… - Posted by John Buck
Posted by John Buck on January 29, 2002 at 13:37:16:
Ok, I went to lunch. I meditated. I breathed in and out. I also drained my bank account for that $1,000 cashier’s check. But, I think I have some more constructive ideas now. Thanks for the input though all.
I think this is what I shall do. It’s a thin margin, but not so thin that it can’t make sense. I have an investor that normally invests with me, I pay him 15% on short term loans. I think for this instance I will take him on as a partner. The house is still a good house, just not as good of a deal as I would have liked.
He puts up the 20% downpayment plus closing costs. We split the costs of the renovation, and any mortgage payments that arent’ covered by a T/B. I get the mortgage in my name, I have excellent credit. And we split all income. We sell to a T/B. $72,000, $2,500 option consideration, $750 Lease payments. (Mortgage with PITI should be around $420) I’m not without experience in Lease/Options I know this will fly, I think I was just dejected because I planned on using this deal for quick cash. The house has so much curb appeal, I know it will sell quite quickly. Everyone who sees it says wow, that’s really cute. And the floorplan is quite attractive as well. It’s just worth 10k less than I thought it was which is a huge chunk when we’re talking about a $65k house. For the investor it should be a decent deal, because with his $15k investment his cut of the rental income alone is around 14%(about what he gets on the money he loaned me on a rehab). But, when the option is exercised it should provide an ROI in the 35-50% range. So, it’s good for him. And good for me, other than the fact that I’m personally on the hook for the mortgage.
If I cannot find an investor to provide the funds to me to close, then I shall probably walk on the deal. I’m not going to go down the tubes to save $1,000. Obviously that’s idiotic. But, with a track record of about 15-18 deals. Great credit(680+/-) and a return of at least 35% secured by property purchased at 80-85% below market value. It should make a compelling offer.
What do you think?
John Buck
Re: Dumb Mistake of the Day. Please Help!! - Posted by Rob FL
Posted by Rob FL on January 29, 2002 at 12:12:30:
The HUD rules for investors are pretty stern. If the paperwork isn’t signed before-hand and the earnest money isn’t received by the broker in certified funds. The broker is in deep doo doo if you back out. This could involve civil and criminal penalties from HUD.
You might be able to weasel out and blame ignorance, but HUD could potentially come after you as well. HUD is an agency of the federal government and like the IRS they really don’t care if they end up taking all your assets or throwing you in jail. Doubtful this would actually happen, but I wouldn’t dare take the chance.
I’d either close on it and figure out a way to make the deal work or pay the $1000 dollars and chalk it up to experience.
Re: Dumb Mistake of the Day. Please Help!! - Posted by J.P. Vaughan
Posted by J.P. Vaughan on January 29, 2002 at 11:57:30:
I’d tell the broker the truth.
“You know what, Mr. Broker? I really screwed up on my bid for this property. I need to cancel my bid. HUD has every right to keep my deposit, but if I could get it back that would be great. I hope you understand because I’ll be doing a lot more deals with you. I was just way off on my numbers for this house.”
Putting $8,000 cash into the deal for $300/month is not wise. Cut your losses now.
Just my opinion…
JP
Re: Meditation is good… - Posted by Dave T
Posted by Dave T on January 29, 2002 at 14:24:59:
Even though you were notified that you won the bid, your broker has not (probably) received a signed contract from HUD. Once the broker has the signed contract, then you have 60 days from the date of HUD’s signed contract acceptance to complete the purchase. All in all, I would guess that you should have about 75 days from now before you have to show up at settlement.
With this 75 day cushion, will you be able to complete some of your other deals and get the cash cushion you need for downpayment and repairs?
Further, if you already had $500 in escrow with your broker, you only needed to add another $500 for this deal.
Re: Dumb Mistake of the Day. Please Help!! - Posted by Mark
Posted by Mark on January 29, 2002 at 12:25:31:
The broker gets hosed, as he should, not the buyer!
How could the buyer possibly have any liability? He did exactly as the broker instructed.
For pete sake, Rob, take all the buyers assets and throw him in jail???!!!
Re: Dumb Mistake of the Day. Please Help!! - Posted by Rob FL
Posted by Rob FL on January 29, 2002 at 13:37:25:
A quote right off of firstpreston.com :
"Further, brokers and buyers are warned that all bids must be legitimate. Fraudulent bids subject all parties, including brokers and buyers, to severe penalties under the law. The bid you enter is fraudulent if you do not have in hand the qualified buyer whose Social Security number will be entered on the bid screen, and who has given you proper earnest money to hold on behalf of HUD. This warning will be repeated, and certification of a good-faith bid will be required, each and every time you enter a bid. "
Re: Dumb Mistake of the Day. Please Help!! - Posted by Rob FL
Posted by Rob FL on January 29, 2002 at 13:34:22:
Go to www.firstpreston.com and start looking around. Everyone is liable. Read about all the wonderful crimes and punishments.
Re: Dumb Mistake of the Day. Please Help!! - Posted by Mark
Posted by Mark on January 29, 2002 at 16:37:33:
I’m not a lawyer, but I have to believe we are responsible for our own actions (OJ not withstanding) and not the actions of others.
Brokers submit bids based on information given to them by the buyer. If the buyers submits a fradulent SSN, the buyers is liable. If the broker says the deposit is $500 when it is really $1000 dollars and the buyer submits good funds in the amount of $500, how is the buyer liable?
On the flip side… - Posted by John Buck
Posted by John Buck on January 29, 2002 at 14:55:00:
Another quote from FirstPreston.com:
“A binding contract is still subject to timely receipt of a properly completed and signed HUD Form 9548 and satisfaction of all other necessary HUD preconditions and requirements to a contract for purchase of Real Estate. Contracts are not considered binding until execution and delivery of the contract to the purchaser or the purchasers agent by First Preston and/or its authorized affiliates. If required or requested documents are not received in proper form within the timeframe provided (normally 48 hours from request), we reserve the right to deem the offer “non-responsive” and re-list the property for bidding. If there are no other acceptable bids submitted during the advertised period, the property will continue to be advertised for sale.”
So, on the flip side, if the documentation is not correct, and nothing has yet been sent to HUD. Then the contract would be null and void as well. So, theoretically, if I talk to my broker as JP suggests, it should be fairly easy to get the bid cancelled by not submitting all the paperwork. There should be no legal recourse for HUD as this happens all the time. Once it took my broker 3 bids submitted for me to get an offer through. This was a different broker though. For example I have two pre-approval letters one from a month and a half ago that should cause the contract not to be binding as it doesn’t fit their guidelines. Or something along those lines. It’s just another option to consider.
JB
1st preston only handles 22 states… - Posted by David Krulac
Posted by David Krulac on January 29, 2002 at 19:44:48:
so they are not the only manager. Most of the rules are similar but there are some differences.
Some friends of mine bid on three house in one weeks bid, against my advice. I said what happens if you get all 3? they said there’s NO Way that would happen.
Guess what? WAY.
They ended up only closing on one and losing their deposit on the other two. Not pretty but true.
David Krulac
Re: Dumb Mistake of the Day. Please Help!! - Posted by Nate(DC)
Posted by Nate(DC) on January 29, 2002 at 17:41:31:
But in this case, the broker followed the buyer’s instructions and the buyer later changed his mind. How is the broker liable for THAT?
NT
Re: On the flip side… - Posted by Dave T
Posted by Dave T on January 30, 2002 at 24:02:48:
Your broker can withdraw a pending bid with no penalty. Once HUD has closed the auction and you are the winning bidder, failure to complete settlement as an investor only costs you your earnest money deposit.
I once was in a similar situation where the bid period was about to close and I had to get a bid in before I had my contractor’s rehab estimate. I won the bid, but then my contractor’s rehab estimate was too high to make the deal profitable.
I just sent a letter to my broker telling him to rescind my offer on the understanding that I would forfeit my earnest money deposit. I lost my deposit on that deal, but not my credibility with my broker or HUD. My broker still works with me and I have bought four more government foreclosures through him since.
Re: On the flip side… - Posted by Rob FL
Posted by Rob FL on January 29, 2002 at 15:49:05:
I’m sure everything will work out just fine. If the paperwork doesn’t make it on time, they may just re-auction, but they also might ask for the $1000. The paperwork isn’t necessarily the only binding thing for HUD. The electronic bid could also cause a stink.
I just know from a broker/investor’s point-of-view that the number one guys NOT to play games with are government agencies. I worked in the title insurance business for years and saw a lot of investors, title companies, attorneys, brokers, etc. get fined, jailed, loss of licenses, etc. because they screwed with HUD.
I’m sure you will figure out some solution to all this though.
I had a similar situation like this last year. All the paperwork was signed and I had the $1000. The buyer was trying to flip the property and realized they bid too high shortly after the paperwork was mailed off. It ended up that Southeast Alliance sent me a certified letter to forward the $1000 or risk penalties, bla bla bla. The investor lost the $1000.
Re: 1st preston only handles 22 states… - Posted by Rob FL
Posted by Rob FL on January 30, 2002 at 08:01:59:
I was aware of First Preston only working some states and not others. But like you said, the rules are pretty much the same everywhere because HUD ultimately makes all the rules and their property managers simply set up ways to enforce the rules.
I think someone said in the Subject To posts below that it’s always wise to have cash reserves in case you get into a crunch. Winning multiple HUD bids is rare but I’ve seen it happen before. Winning 3 HUD bids is a good thing unless you can’t handle it financially. Why not simply flip the excess to other investors?
Re: Dumb Mistake of the Day. Please Help!! - Posted by Mark
Posted by Mark on January 29, 2002 at 18:28:29:
It’s not entirely clear to me what happened. But if a broker submits an offer indicating receipt of $1000 when he really only has $500, the broker has broken every rule in the book (agency laws, contract laws, HUD regulations), no matter what the buyer has said or done.
Re: Dumb Mistake of the Day. Please Help!! - Posted by LUCKY
Posted by LUCKY on January 29, 2002 at 22:55:50:
I think the problem with the deposit going from $500 to a $1000 was when John resubmited the the from 45K to about 51K as he stated,when the bid goes over 50K the deposits increase to $1000 thats my understanding. JUST MY THOUGHTS
LUCKY IN KY.