What should I have done?

8 Replies

This is my first official post. I am a first time home buyer and was looking at buying a HUD home. This was a very nice home built in 1987, 2 story, 4 bedrooms, 2.5 bathroom, attached garage, pool and hot tub, wood floors, recently remodeled kitchen, and on a half acre lot. Very nice. HUD has it listed for $232k and the county had it appraised at $285. I bid $255k. First, do y’all think I over bid? Home was inspected and it came back that I might need a new roof (due to hail damage, and a entire new HVAC system (original with the home, over 30 years old). Roof $8k and HVAC $6k. Total of $12k just to move into the home. That doesn’t include the 20% down $51k + closing cost. I would be looking at $68k just to move in, ouch! So, I killed the contract. What would y’all have done?

Hello Hudson!  I hope you get plenty of comments that will help you along.  I think you bid too high, I would have probably bid about $160,000.  I am a little bit confused not feeling sure why you bought this house?  Was it going to be for yourself, was it going to be a quick flip, or were you going to rent it out?  What were your goals and does what you did comply with that.   I think you did the right thing and to not close on it and, hopefully, only lost your deposit.

My ultimate decision would be on knowing for sure as to why you bought it. Do not buy SFH's with one unit to rent it out. That is too risky. From listening to a gentleman that makes his living on HUD homes tells me you need some experience to do that successfully.

Why did you bid more than the asking price? Was there multiple offers? If this was going to be your primary home, then I guess it wouldn't have been too bad. Most people when they buy their primary home pay close to the appraised value. 

If it was for a rental, it's hard to tell if you would've paid too much without knowing the potential rent and your PITI.

For a flip, you definitely would have overpaid.

There’s always another house, another deal out there.

I think your biggest mistake (since you’re asking) was basing your offer on an appraised value. Most (all?) cities have their own formulas for figuring out appraised value for taxes. They rarely have any bearing on the actual VALUE of the house if you were to buy/sell. They have some calculator that says ‘x BR, y Bath, z sq ft = $$$’ Not reliable for anything other than figuring out the amount of taxes you’ll be paying!

Yes you over bid since ultimately you could not afford the property. Never offer more than you can afford and always plan for additional costs in your offer. Price is irrelevant if you can not afford to pay what you offer. 

You obviously wanted the property more than you needed the property. Emotions come with a very high price tag.

What type of investment was this for? Was it your own primary residence or an investment property....need some more info and analysis (rent prices or ARV for flip to know more)

Why 20%? down I assume this was owner-occupant bidding period. You need to find a good realtor that knows HUD stuff inside-out and can tell you what strategy to use. I also mirror others' ARV thoughts.

First of all, thanks for sharing your less than awesome experience. There’s more to learn in failure than success! Also, let me say that I’m new, I don’t have my first buy yet, and still filling up on theory. Something I keep hearing about the 70% rule. My understanding is the ideal max price to pay is 70% of the ARV (after market value, mentioned above) minus repair costs.

For example, a house in need of 5k in repairs is listed for 90k. After the repairs (its ARV) it’s worth 100k. Start with 70% of the ARV (100,000 x 0.7 = 70,000). Then subtract the repair costs (70,000 - 5,000 = 65,000) and bid 65k. Also, have a cap, or a limit you don’t go over.

As some have already mentioned, your purpose is unclear, and that’s a big factor in determining your price. I’m looking to buy and hold, so my focus is cash flow.

I struggle with learning how to figure out after market value. (Anyone reading this with any advice please post.) When I practice running the numbers, I start with the low end local rents from Craigslist (~$650 per unit), divide it in half (50% rule - $325) and subtract the cashflow I want ($100 per unit) in the end. Then I multiply the asking price by 0.7, pull a rehab number out of my butt, double it, subtract it from the number, and punch it into the mortgage calculator. Then subtract the projected mortgage from whatever’s left. If it’s more than zero, it’s worth a second look. That’s where I’d submit it here for a community look.

Again, I’m new and if anyone has any critiques or advice, please let me know.

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