A deal that had it all

It all started with a BiggerPocket podcast episode. The guest described how his REI business was entirely built on HUD homes, and it got me research HUD homes and led me to a small town in Oregon, with population of ~2K people, for an auction. 

The house that was being auctioned off by HUD was offered once before, but had no buyer showing up to purchase; so HUD waived many requirements during second offering. I was hopeful that I will end up buying a house at a lower price to rent it out later. This hope led me to load up entire family (wife and two kids) in my minivan and start driving. The auction was supposed to start at 9AM and at 8:59AM another bidder shows up. On one hand I felt sense of relief, as presence of the other bidder meant validation of my idea of buying that property, but on the other hand its competition. After a long bidding war with lots of thoughts and discussions about giving up; we finally won the auction, buying the house at 140K. 

But, this was just a start of a long journey of actually buying the property from HUD. This being a project house prior; HUD had placed restrictions on who can purchase the property and what can be done with it. I had to produce documents promising to follow all use restrictions including keeping it as an affordable housing unit for next 20 years; submitting a Letter of Credit as collateral for fixing all the things that are wrong with house; Selling only to HUD approved buyer and many more. After a lengthy process of documentation, negotiation, communication and delays due to budget; finally I had an approval from HUD to close on property around mid June. This 2 and half months included lots of hustling to get everything sorted out; be it opening business banking as sole prop to get Letter of Credit or Finding property manager just to fill out some documents but never use them. 

After all this hustling, time came to close on house; which meant financing. I had to pull cash and liquidate my stocks but I cam short because of that other bidder. So now, my option was to pull money out of my rental property or primary home. I started exploring options of HELOC on rental but majority of lenders turned me down. Finally found a portfolio lender; who was willing to open HELOC on rental property. They also waived some requirements on loan if I reduced amount to certain threshold; and I did. 

Finally after closing on house; taking possession was also an interesting journey. Trying to find previous owners just to get keys from; was a challenge in itself. Breaking into your own property by drilling the lock is an interesting experience. Looking inside a property for the first time after buying is also a unique feeling where you are hoping things are not too bad; and thankfully they weren't. 

Now, thinking about the purchase and how to manage it and rent it and restrictions HUD put on the property; and also after running numbers; we finally decided that it might be beneficial to rather sell the property; so we list it pretty much immediately. This is where advice of finding right team comes into picture. We found gem of an agent, who took care of the property, found and worked with the contractors in next couple of months. This wasn't a cookie cutter house by any means. It was optimized to have maximum occupancy. Had 11 bedrooms and 3.5 bath but only had small backyard; so it was not an interesting purchase for many buyers. 

After long and grueling wait from June to November; finally we got two offers. Out of two we selected the stronger one and started process with HUD to get buyers approved for the house. HUD took couple of months to approve them, but it was rather easier approval as they wanted to use the house as primary residence. 

After HUD approval came financing of the house. Buyers started out with a FHA loan application; but it fell through during the process. In HUD restrictions; there was a clause against FHA loan. So, they ended up finding some other lender and we were hopeful again. This time the deal fell through during appraisal as the appraiser informed everyone that this loan can't be sold in any market so nobody will fund it. Entire transaction came to a screeching halt. 

So, we decided to seller finance the house. Now, came tax part. We decided that it is beneficial for us to do a 1031 exchange. We got QI but question was seller financing. How do you 1031 exchange a note. Again, great team advice proves correct. Dave (Our QI) advised us to buy out note from the exchange account. We were able to use HELOC to buy out the note to purchase exchange property and close entire thing; and now we are in process of refinancing the new property to pay off HELOC. 

It is essentially our first REI deal. The rental we own was our primary residence. So, this has been an educational deal with tons of things involved. Thanks BiggerPockets for get us going on this route and helping on each step of the way.