Category Archives: Real Estate Rental

Masochists guide to buying a HUD foreclosure

Everyone and their brother is buying real estate to rent to a tenant now because prices are low and the rental market is red hot. Most investors pay cash and buy low priced condos. More and more, I see well-meaning folks choosing to buy HUD foreclosures that are $100,000.00 or less. These are properties that had FHA mortgages, were foreclosed and HUD is reselling them after the foreclosure.

Buying a HUD foreclosure is a quirky mess and much harder than buying a Fannie Mae or Freddie Mac foreclosure, which I wrote about here.

In fact, you pretty much have to be a total masochist to put yourself through buying one of these. I don’t recommend buying one of these as your primary residence. Many of the properties are a wreck and you will have problems with the appraisal (see number 2 below). Only seasoned investors should buy these, and even they should be aware that they are marching into a swamp and should proceed with caution.

Here’s why HUD buys are so painful:

1. Earnest money will be gone if you cancel. I often tell clients that there is no way they will lose any earnest money on a purchase because I watch the date deadlines carefully and I know how to get the earnest back. Scratch that on a HUD buy. It is VERY LIKELY that you will lose your earnest money if you cancel a HUD purchase after the home inspection or later. Generally, the earnest money is only $500 to $1000, but who wants to flush that down the drain? HUD is terrible about returning deposits and if you cancel, the earnest money is toast and most likely you will never see it again.

2. Watch out for the appraisal if you get a mortgage. If you try to get a mortgage to buy a HUD property, most likely the appraiser will find problems with the property and will require that these things be repaired before closing. I recently had a Buyer try to purchase a HUD and the appraiser wanted a structural engineer to check the foundation and required thousand in repairs. That deal was dead on arrival. The problem is that you can’t make the repairs since you don’t own the property and HUD will refuse to make them.  There is a type of FHA mortgage called a 203k loan that you can get to make repairs on the property, but getting a 203k loan is like scaling Mt. Everest barefoot.

3. No attorney approval clause. Your attorney can’t make any changes to the HUD contract. You are stuck with it. It is an “as is” sale. You can’t cancel the contract 5 business days after signing it, like a traditional contract.

4. No title insurance from seller. HUD does not pay for title insurance, so you will have to pay $1500 to $2000 for an owner’s title insurance policy. Normally, the seller does buy title insurance, but HUD buys are different and the buyer has to pop for it.

5. With a condo, you will get stuck with 6 months of the foreclosed owners dues (plus attorney’s fees). Illinois law allows condo associations to charge the buyer for 6 months of the foreclosed owner’s condo dues, plus attorney’s fees. Usually, the seller will pay this (about 65% of the time) but not on a HUD buy. You will get sacked with this extra cost which ranges from $900 to $4000. Freaked out about buying a HUD yet? I don’t mean to be so negative, but I speak the truth here and it is not pretty.

6. You pay for extensions even if it’s the seller’s fault. This is perhaps the most annoying facet of buying a HUD. HUDs often close late, mainly due to the seller’s delay in ordering the paid assessment letter from the condo association if the property is a condo. If the closing does not happen in 45 days,the Buyer has to sign an extension form AND pay for the extension. The payment depends on the sales price and is about $200. The buyer has to do this even if the delay is the seller’s fault. The selling real agent has to handle this chore. If the agent doesn’t ask for an extension, the property goes back on the market and you lose your earnest money.

7. Waiting on the RESPA at closing. Assuming you finally get to closing, you have to sit at closing and wait until HUD signs the RESPA form that has all of the closing figures on it. They will not let you sign it until HUD signs it. Make sure you have three books fired up on your Kindle because you will be waiting for some time my friend.

8. Buyer pays for local transfer taxes. If you buy a property in a town that has a local transfer tax (that the seller would normally pay) like Elk Grove or Schaumburg, you Mr. Buyer will have to pay for and obtain the transfer tax stamp before closing. The seller will not pay for it or go get it.

You are far better off buying a Fannie Mae or Freddie Mac foreclosure (although they have their own quirks), but please be careful with HUD buys.

Long and winding road in evictions

It’s always hard to explain the eviction process to a client.  I put together this diagram that shows the flow of a forcible entry and detainer case, which is otherwise known as an eviction.

Landlords always  refuse to accept the fact that it’s  difficult to recover rent in an eviction case.  My estimate is that rent is collected (after the case is filed and judgment is entered) in about 10% of eviction cases. The plaintiff will get a judgment for the rent that remains open for 7 years. Getting paid for the judgment  is another story. A wage garnishment can be used, but this yields very little and expires every 90 days. The judgment for rent is reported to credit bureaus, but it seems that most tenants who are behind on rent are not concerned about this.

Generally, a landlord can get possession of the property back through the eviction case in about 60-90 days. The filing fees are about $400 and attorneys fees are anywhere from $300 to $700.  As the diagram illustrates, it isn’t easy or fast.

Series LLC comes to IL

Delaware pioneered the Series LLC. It’s an LLC that can have different series within one LLC entity. In August 2005, IL approved a similar statute.

Once the bugs are worked out, a Series LLC may be the perfect vehicle for real estate investors. Each property could be put in a different Series. There would be only one filing fee for the Series LLC and the client would not have the cost and hassle of multiple LLCs to hold title to multiple properties.

One commentator does not recommend using Series LLCs in IL yet.

The IL statute says that if the correct filings are done with the state:

"then the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof…"

Here is the link to the IL statute.