Just ask my wife Jean. This year was supposed to be quiet. No big Real Estate deals, no travel, just a normal year at home with the family. But things have a way of happening despite our best laid plans. In January I was surfing the web looking at mobile home parks in the South East US. It's what I do for fun. My goal is to replace Jean's income by the time she turns 55 and help her retire early. That way we can go and do the things we want, not the one's our Bosses want.
Anyway, I was just looking around and found a site called HUBZU.COM. It's an auction house for properties that have been foreclosed. Many of the properties have sat vacant for years. There were a couple of small mobile home parks listed. But, they had all the earmarks of major work and higher risk. You know, 80% park owned homes, onsite sewer treatment facilities, declining demographics. Not anything I wanted to get involved with. But, as I was going through the properties I ran across a farm for sale with a big house, a large barn and a guest house. The property was listed at 50% of the tax value and it seemed to be in an area of high rents. It had 10 acres and killer views of the ocean. I showed it to Jean and she seemed interested. But with a wise "Were not supposed to buy anything this year" look. So I set the farm property aside and continued looking for larger mobile home parks closer to Oregon.
As January came to an end I was getting pretty bored with nothing to do here in Portland. Housing here is stratospheric and mostly all downside unless you can pay cash and flip them quickly. I did not have a half Million sitting around so I was sidelined for the moment. One dark cold evening I pulled up Hubzu again and was surprised to see nobody had bid on the farm property. That was "crazy" I thought. It's sitting at 50 cents on the dollar. There must be something seriously wrong with it. A few days later I watched the auction end, a low bidder appeared to have won and the farm was taken off the active listings on hubzu, realtor.com and zillow. I was sure someone had made a great steal and was celebrating their good fortune right now.
A few days later I was looking at Hubzu again and low and behold there was the farm back on auction. But the price was reduced by $20k. So the buyer had not been able to get financing maybe. I called the listing realtor who worked with Hubzu and got the cold shoulder. He told me he would only speak to a licensed Realtor who represented me. A bit of a pain considering I didn't yet have a realtor and would prefer to keep one out of the picture if at all possible. It just seemed a bit weird to me. So I spent that day researching hubzu.com. The internet is chockablock with complaints from? you guessed it, Realtors. Things like "Worst company to ever deal with" were common. There is quite a lot worse said about them but I wont repeat them here.
The search moved over to one of my favorite sites, Biggerpockets.com. I wanted to hear what the investment community had to say about Hubzu. Most of it was pretty negative and the vast majority of that was from newbie investors. But as I looked further it became clear the more risk intensive investors were making money on Hubzu properties. One of them even had a strategy on how to work his way through the Hubzu quagmire. He had purchased three homes and was in the process of buying another. The last home he had purchased for under thirty thousand and was cash flowing about a thousand a month already. A bigger pockets dream come true for sure. With three of those and our current holdings Jean could begin to look at retirement. I was fascinated.
The first thing I discovered about Hubzu homes is that they are in such poor condition that no bank will loan on them. Even when the hubzu site says that financing options are available it really means,"good luck finding a bank that will lend on this place Charlie".
The farm was such a place. It stated that financing was available on the website. But as I read through the bigger pockets comments I learned that Hubzu is not what it appears to be. It turns out that back in 2008-2009 an American bank failed and took with it thousands of bad loans made mostly to European retirees who had invested in American real estate through giant hedge funds. Ownership in these foreclosed properties was fractional and in truth no one really knew who owned what. Take the farm for example, it's mortgage had been purchased by Deutsche Bank for nearly $700k.
Another fascinating thing about Hubzu is that it is not operated in the United States, but rather India. Because the failed bank moved to India it found ways to ignore most US Real Estate laws in doing business. Hence the huge number of complaints from Realtors here in America trying to help buyers. Absolute scathing reviews from most Realtors. But again the successful bigger pockets investor only pointed out that it was better for him as it reduced the competition on these properties. If it was better for him then it was better for me as well.
The big difference between the BP investor and myself was that he had his real estate license and I did not. That allowed him to buy the homes and save the commission (3%) whereas I had to work through a realtor and add 3% to the final amount paid on a given property. Hopefully he was not looking to buy the farm.
My next step was to take action. I had to make a bid on the farm before I could enter the Hubzu system. My problem here was it was breaking a promise made to Jean about having our calm family 2016 year. We talked it over one evening and being the absolutely amazing woman she is she let me off with a slap and told me to put a bid in on the farm. After all a bid does not mean your actually going to win. Challenge one completed.
There is a strategy to bidding on Hubzu that's not unlike sniping on Ebay. You wait until the last 30 minutes of the auction and then place your bid. Unlike Ebay there is no fixed terminus. When a bid is placed within the last twenty minutes it extends the clock. As long as there are new bids the clock will continue to extend. But, hubzu uses robot bidders. It seems to be one of the biggest complaints about the site. Having read about this we watched and sure enough there was an immediate counter bid $10k higher. Here is the nerve wracking part. If you believe it is a robot your let the machine win the auction. Then watch for the property to be relisted at a lower price the next week. If it's not relisted that means you lost to a live bidder. Like I said a bit nerve wracking.
The farm was well above what I wanted to pay for when first seen. It had already dropped $20k with the relisted value. We waited to see what the farm would do. I have to say there was a bit of nail biting going on. But it was relisted again two days later. Once again for $20k less. Having survived the ordeal I was now willing to push Hubzu as far as I could to get the price down. I let the auction close six days later with no bidders. It was relisted three days after, again with a further reduced price. This time I payed more attention knowing it was ridiculously undervalued and some other savvy investor might run across it. On the auction closing day I placed my bid twenty one minutes prior to closing. The robot upped the bid by $10k. Then another investor stepped in and raised the price by $25k. We kept at it over the next hour slowly raising the price by smaller and smaller increments until my competitor went past my max. Oh well, it had been fun, but it was over. I tried to tell myself that it was cool. But it was a lie. I was having a hard time loosing the auction. Jean and I talked about it and she asked me about the finance clause that Hubzu had added. I told her that these were really cash properties. She said I should have some faith. She is usually right about those things. So as a lark I placed a backup bid $10K higher and put the farm out of my mind.
As it turns out not to surprisingly the next morning I received an email saying we had won the auction. Challenge two completed. Hubzu had blown off the competitor for my higher bid. Now we had to put financing together and add skin to the game, as a $9000 deposit was expected. I had to interview realtors and find one willing to work with Hubzu. Fortunately, I found Woody who was a total team player and followed the entire process with tenacity. Challenge three done. Then we needed financing. I found several people, but chose one of the best in that area. Two days later we had pre-approval and were going through initial underwriting. That's when it all came to a crashing halt. The appraisal came back with significant mold issues, roof issues, termite issues etc, etc, etc. Underwriting canned the whole deal. Brady, the loan officer helped me work through two other companies, but each in turn said no due to the appalling condition portrayed in the appraisal.
Note* the appraiser was wrong. None of his comments turned out to be remotely as concerning as he made them out to be. But the damage had been done. This left us no option but to refinance one of our other properties and buy the farm with cash. With pre-approval, and all our documents in digital form in a single folder, it was easy to step through the process of refinancing a proven investment property. Though it came right down to the same day, we closed on the Refi and the purchase of the farm within hours of each other. Challenge four completed.
It was a team effort, the Big Guy upstairs, our realtor Woody, banker Rebecca, and the Hubzu realtor Scott that pulled this deal together. If your going to close on a Hubzu property I recommend choosing your team carefully and be tenacious. There are a hundred little things that will crop up. I have over simplified the number of significant hurdles we had to jump here in this article. But, if you expect them and are patient you will be rewarded. Jean and I just received an updated tax evaluation on the farm last week. It's value is 200% of what we payed for it and she feels better about the farm having seen it in person. So much for the quiet year of 2016. Let's see what 2017 brings. Hopefully some time on the beach with our toes in the sand.
