The Tycoon Report

Diary of a Mad Real Estate Investor

Friday, January 29, 2010 | Ethan Roberts

Tycoon readers,

You know the thing that scares me the most about the government wanting to run our healthcare system? 

It's the way they run their other programs!

I'm sure you know their track record at running the Postal Service, Medicare, Medicaid and Social Security. 

Well, the one I am going to add to that list today is the Department of Housing and Urban Development, aka HUD.

As I have mentioned in this space before, when a borrower defaults on a Federal Housing Authority (FHA) loan, the FHA (as the insurer of loans) pays off the lender, and the home is then re-sold by HUD. 

You may have also heard people use the term "HUD foreclosure" to describe these homes. 

However, HUD admonishes realtors to call them "HUD homes" ... and never to use the "F" word.

(And by that, I mean foreclosure!)

So let me tell you a few things about HUD fore... er, um, I mean HUD homes!

Because HUD's main objective is to promote home ownership for lower-income buyers, during the first 10 days that a HUD home is on the market, the only people allowed to bid on it are those who pledge to live in it as their primary residence for a minimum of one year.

And just so you know, if an investor buys it -- pretending they are going to live there -- but then rents or re-sells it, they are guilty of fraud and can be sentenced to two years in jail and fined $250,000.

However, if no acceptable bids are made on the HUD home during the first 10 days it's on the market, then starting on the 11th day, investors may bid on it as well.

A Dream (HUD) Home

So, when a nice HUD home comes on the market, I often preview it, in case it gets past the owner-occupant bidding period. 

And that was the case this past month, when HUD listed a home with nice features, in a good subdivision, about 10 miles from my home.



The home was a three-bedroom, two-bath, 1,457-square-foot ranch, built in 2001.  The listed price was $102,000, and from researching the comparatives in the area, my feeling was that the home would be worth about $125,000 after some rehabbing.

The original price of the home in 2001 was $112,000.  Between 2006 and 2007, the owner listed it for sale for as much as $207,000 -- later dropping it down to $190,000. 

So, even at $102,000, the home was about 50% of its 2006 price.

But when I went to preview it, I saw that it needed quite a bit of work ... including patching walls, interior paint, new carpet, ceiling fans, fixtures, repairing doors, etc. 

In addition, all of the kitchen appliances had been removed.  This was obviously deterring others from buying it.

So clearly, if I did buy this property, I would want to pay a lot less than the list price!

Now, I know from past experience that HUD homes can often be purchased at about 87% of the list price or higher. 

However, the 87% is a net amount that includes the selling agent's commission and any closing costs that the buyer asks HUD to pay.

But recently I have been seeing HUD homes sell for considerably less than this.  In fact, some were selling for 76% to 80% of the list price!

So on Dec. 29, when the owner-occupant bidding phase for this HUD home ended without a successful bid having been made, yours truly made an offer of $83,640, which was 82% of the list price.  I wanted to see if they would accept a lower-than-normal offer.

Now, the way HUD works, they either accept your bid or they totally reject it.  This fine government agency does not want to waste its time with negotiating.

So the next day, when I checked the HUD Web site, I saw that they had indeed rejected my bid, and the house was still available.

Darn!

Undeterred, I tried it again.  I upped my bid to $84,660, or 83% of the list price. 

And when I checked the site the next day ... once again HUD had rejected my offer.

But the good news was that nobody else was bidding on the house, either.

A few days after the New Year, I took one more shot, offering $85,700, or approximately 84% of the list price.

But STILL HUD did not love my bid.  

Talk about feeling rejected!

Words to Live -- and Invest -- By

Fortunately, those marvelously soothing words of Tycoon editor Teeka Tiwari began to ring in my ears. ...

"Let the game come to you, Ethan, let the game come to you. ..."

At that moment, Teeka's philosophy filled and engulfed me and I said, "Forget you, HUD.  I'm not chasing your price.  I'm going to bid on another house!" 

So I found another house that I liked -- a less-expensive bank foreclosure that was decent, but really not as attractive as the HUD home -- in a somewhat-inferior neighborhood. 

Nevertheless, there was tremendous equity in it, and it would make a solid rental, so I made a bid on it.

Then I waited ... and waited ... and a few days later, I was informed that there was another offer on that house, and the bank was asking for everyone's "highest and best offer."  

So I bid it up a little bit higher -- even going above the list price, because it was priced so well. 

And again I waited ... and waited ... and waited. ...



Meanwhile, I know that if a HUD home does not sell within 30 days, HUD will usually drop the price about 10%.  And the 30th day of the HUD listing came and went, and still it had not sold.

But on Day No. 34 of the listing, HUD dropped the price from $102,000 to $91,800.

However, there's a catch. 

When HUD drops its list price, the house then returns to "owner-occupant only" status for the next five days -- and investors once again must sit on the sidelines.

As soon as I saw the price reduction, and with the bank dragging its feet, I decided to re-visit the HUD property, just to make sure I was still interested. 

But as I approached the subdivision, I was chagrined to see a large sign, saying "Government repo home ON SALE today." 

And as I turned down the street and approached the home,  I was astounded to see a real estate agent leaning out of the window of his vehicle, frantically waving a listing sheet in the air at every car that was driving by!

This dude wanted to sell that HUD home in the worst way!



Disgusted and forlorn, I drove home, figuring this agent would probably find at least one owner-occupant customer to make a bid.

So for the next five days, I sweated out the owner-occupant period. But as each day passed, amazingly there were still no successful bids.  I was becoming more and more hopeful.

Coincidentally, on the fifth day, I heard from the realtor who was representing the bank on the foreclosure home. 

She sent me a terse e-mail, saying, "Sorry, the bank has decided to go with another offer.  Thanks for showing the property."

Would the Third Time be the Charm?

In the meantime, I had also bid on a third home the previous evening, via an online auction site. 

This third home, also a bank foreclosure, was a lovely three-bedroom, two-bath, about 1,520 square feet, in a neighborhood of homes that sell for $140,000 and up. 

When I previewed it, I couldn't believe the excellent condition of the home.  It would need very little rehabbing.



The listing agent had placed an initial bid of $57,231 on the house, a lowball number if ever there was one, perhaps in an effort to attract a bidding war. 

About eight days prior to the auction, someone had made a first bid of $70,100. But by the last night of the auction, there were still no other bids on the home.

One problem with this process was that most of the homes for sale on the auction site had a reserve bid, meaning that if no bid met or exceeded the reserve amount, the seller had the right to reject all offers. 

And the reserve bid was not made public.

So about 20 minutes before the end of the auction, I bid $70,600 -- fully expecting someone else to bid the home higher within a few minutes.

But nobody else bid.

I was ecstatic, until I saw the page that displayed my bid information, because in big letters it said "RESERVE AMOUNT NOT MET." 

As the auction drew to an end, for some reason, they extended it another 15 minutes. 

So, trying to hit the reserve and land this house for perhaps $65,000 less than its actual worth, I made another bid at $72,000. 

But again I did not meet the reserve amount, and once more they extended the auction for another 15 minutes.

So I gave it one more shot and raised my bid to $75,000, just trying to hit the reserve. 

And for a third time, my bid fell short of the unknown reserve amount.

So now, once again I'm hearing the voice of Teeka in my head. And this time he's saying:

So I quit making bids, and the auction ended without a successful bid to meet the bank's reserve number. 

No third-time charm for me.

But, actually, the game was coming to me. Perhaps it just took a detour along the way!

OK, remember that HUD home?  The five days of owner-occupant-only status had passed, and this time I decided not to fool around, and to bid the house at just a little over 87% of list price. 

But remember, since my last bid, HUD had dropped the list price from $102,000 to $91,800.

So now my new bid was $80,105, or about $3,500 LESS than my lowest previous offer, and $5,595 LESS than the last bid that HUD had rejected.

The next morning, I checked the HUD Web site, and what do you know. ...

THEY ACCEPTED MY BID!

So that's what happens when the government runs programs. 

There is no common sense or logic utilized.  Nobody at HUD thinks, "This guy is bidding $85,700 and we're getting ready to drop the price to $91,800 in a few days; maybe we should grab it." 

Instead, they think, "This bid doesn't meet our level of acceptability," and then they drop the price anyway.

Eventually, the home sells for an amount well-below what they could have received originally. But, hey, it's now within their robotic level of acceptable bid percentage.

And they want to run our healthcare?

This story had a happy ending (for me, of course!). But at this point, it was far from over.

The day after I won the bid on the HUD home, I received a call from the listing agent representing the bank at auction. 

He finally disclosed that the bank's reserve number was $97,000, and of course I wasn't close, but...

"Maybe can we work something out...?"

Was the game coming to me?!

So I told him, "Well, let me think about it.  I'll talk it over with my wife, and get back to you." 

I then called my wife, and she said, "So you want that auction house instead of the HUD house?" 

And, in my usual charming way, I laughed and said, "No, I was thinking in addition to the HUD house!"

And she said, "Well, if you buy both houses, you have to buy me a car, too!" (Her old reliable 1999 Toyota Camry has seen better days.)

What can I say?





See you next week!





Ethan Roberts
Contributing Editor
The Tycoon Report