Making offers on HUD Homes
on November 17th, 2009
Over the years I have purchased many HUD Homes. I was feeling good about making an offer on a house recently so I decided to make another offer on a HUD Home near downtown Dallas. Now this is out of my comfort zone for sure. I have never purchased a house in this area before. The thing about real estate though is you can often jump out of your comfort zone and if you land on your feet you might just make yourself a lot of money.
When I bought my third house it was a townhouse. I was very scared and thought long and hard about it. And it was only 35k. Eventually you just have to realize that you only have so much downside potential. It is certainly worth more than zero. So then what is it worth? Well who knows what the rock bottom price was but it definitely wasn’t less than 20k or so. So ultimately I was taking a 15k risk which I can live with. If I lose 15k I will be pissed but I am not going to go bankrupt or anything. I can bounce back. I have since made probably 75k off of this neighborhood alone. I have owned 4 properties in this exact neighborhood and will buy more if they come available.
So I have ventured near downtown Dallas. When I don’t have any investments going on I often broaden my horizons. I step out of my normal boundaries in search of deals. I have no choice I either put my money to work or I make nothing. I would rather make something than nothing if the investment looks sound and requires no more extra work on my end.
So the one thing I don’t like is comps are a little harder to come by in this area. No two properties are alike. One townhouse community is nothing like the other community down the street. You are basically comparing apples to oranges and if you do this you often get lemonade. A recipe for disaster in the making. Just like with my 35k purchase years ago I am having a hard time with this one. I have thought long and hard over this one and I have decided my downside risk is very low. Extremely low even which made me pull the trigger. I fired in at 60k and have a feeling I will be getting this one.
My exit strategy is about 7-8k in work and list it way below market for a quick sale. I could probably sell it without doing any work but why would someone buy from me for more than the bank is asking? I plan on giving the townhouse a nice face lift and updating it to todays standards. Even though it was built in 1984 it is defintely looking dated. I am going to put in new light fixtures, granite, paint, and probably redo the bathtub and tile surround. I don’t plan on doing any of the work and think I will get out for around 7-8k or so. I could probably do this remodel in about a week to 10 days. It is definitely very minor. I will then list the property at 99k and hope for a quick sale. If it sells quick and for 99k it will yield about a 22k profit after all fees and expenses. I would be insanely happy with that result. This property is on the tax roles at 135k and should probably be listed at about 115-120k but I want a fast sell.
One mistake I believe I have made in my investing career is pricing all of my houses at the absolute top of the market. While I have had some that have sold for nice prices I have also had some sit for a long time. I will never go back and run numbers but in my head I can tell this was a mistake. If I would have priced my properties slightly below market they would have sold faster I am sure. This would have resulted in a NET gain over the method I used. Holding expenses add up quick and end up costing you tons of money. For example I sold a house about a month ago. It took me about 9 months to sell it and I dropped the price 20k over that period of time. If I would have dropped that price originally I would have ended up making about 8k more in profit. That is how much the holding expenses were and that was on a sub 100k property. Another example that even proves my point and hurts very badly. I sold a house this year for 375k. I held it for just under a year. If I would have just listed it at 375k to begin with I would have made about 30k more in profit. That is some serious money.
