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.