Many real estate investors think the only way to learn how to buy HUD homes is to be a first-time homebuyer eligible for HUD programs, but the truth is that knowing how to buy HUD home foreclosures can be one of the best skills an investor can have. When real estate owners default on HUD home loans, HUD forecloses the properties and sells them at a public foreclosure auction. Finding and purchasing HUD foreclosures can help you save big on your next house or real estate investment property, often well below market value.
HUD (the U.S. Department of Housing and Urban Development) home foreclosure properties have already gone through the entire foreclosure process, which starts when the borrower defaults on the FHA-insured loan used to originally purchase the property, and ends when the originating lender was paid off by HUD (as the loan has been guaranteed by FHA insurance). HUD now has become the owner of the foreclosed real estate.
Like the lenders it insures against borrower default, HUD does not want to become a property owner. So it sells HUD foreclosure homes through online auction companies and approved real estate brokers who advertise themselves as HUD-approved brokers. These HUD-approved real estate professionals advertise their services in a number of places, including local newspapers and phone books.
In addition to weekly newspaper advertisements in the real estate classifieds, HUD homes are also advertised through a number of other sources. For one, local Multiple Listing Services (MLS). So any real estate professional who subscribes to an MLS can find available HUD home foreclosures and listings in their area. HUD lists their homes on the Internet as well at http://www.hud.gov, and HUD home foreclosures can also be found at RealtyTrac.
HUD home foreclosures on the Internet are maintained by various management companies all under contract with HUD. However, purchasing a HUD home can only be done via an offer submitted by a HUD-approved real estate broker or via a HUD-approved online auction.
Based on the agency’s online home buying guide, here are some suggestions on how to purchase a HUD home:
This can be done several ways. A great way to estimate how much you can afford is to use a simple loan calculator or affordability calculator. If you have a trusted financial advisor, talk with them about your plans.
After you’ve come up with a rough idea of how much you can afford, make an appointment with a lender. A lender can officially pre-qualify you for a loan and let you know how much home you can purchase based on a set formula that takes into consideration your monthly gross income, long-term debt and other monthly expenses.
At the end of the day a potential purchaser of any HUD home foreclosure is going to need a real estate agent who has been approved to submit offers to HUD.
Finding an approved agent or broker is not difficult. Many HUD-approved agents and brokers advertise themselves as such in local newspaper real estate sections. Most likely, if you see a listing for a HUD home foreclosure in the paper it will be listed by a HUD-approved agent or broker. Or at the very least a buyer can call a local real estate office and ask whether they have an agent or broker in the office who is approved to work with HUD homes.
Besides the fact that any potential buyer of a HUD home is required by HUD to use a real estate agent, it is a good idea anyway. An experienced agent can be very useful when it comes to getting extra details on the neighborhood, local schools, places of worship, traffic patterns, etc.
Unlike a customary arm’s length real estate transaction, there are no negotiations, no haggling on offers and counteroffers between the buyer and seller of a HUD home. In some cases, HUD may pay a percentage of the closing costs, financing fees, and associated commissions for homebuyers, but HUD rules state that this option is not available to “Investor Buyers”. However, you can include the request for payment of some or all of these costs in your offer and see if the offer is accepted.
Here are just a few of the questions you should be able to answer about the property before you make an offer:
The list goes on and on as to the details that go into the “ideal” home for any particular homebuyer. The idea is to know what you, as an investor, want and what your target buyer or tenant will want before you go out looking with the real estate agent. It also helps the agent narrow down the search so that he or she can only show you homes you would most likely be interested in seriously considering. Making this type of list will also help you determine if there are area HUD home foreclosures that meet those criteria.
Warning: HUD Home Foreclosures are Sold As-Is
Never forget HUD homes are sold in AS IS condition, which means that HUD will not make any repairs, and does not warranty the condition of any of its properties. It is highly recommended, therefore, that the potential buyer spend the money and pay for a professional home inspection before making an offer on a HUD home.
HUD does have a program available through the FHA called the 203(K) loan program, which loans money to buyers of HUD homes in order to make needed repairs. The loan is repaid as part of the mortgage. Properties financed under the 203(k) program must meet basic energy efficiency and structural standards when improvements and renovations are complete, so make sure that your plans will meet these standards and confirm, before obtaining financing, that you are working with an FHA-approved lender if you hope to use this financing.
In many ways, the home purchase process on HUD homes is much more simplified than the conventional way of buying a home.
The initial listing price is determined by HUD to be an estimate of the property’s current fair market value (FMV). The FMV is based on an appraisal conducted by an independent real estate appraiser.
The property is then put on the market for what is called the Initial Listing Period, during which time HUD will receive offers on the property. The first offers to be considered will be those submitted by potential owner-occupants of the property. It is not until after HUD has exhausted all of those offers that it will even consider offers from other interested parties such as real estate investors.
The highest priority is given to offers submitted by potential owner-occupants during the first 10 calendar days of the listing period as follows:
Depending on such factors as time on the market, and the current market conditions, HUD may accept an offer on the property for less than the initial listing price. Once an offer is accepted, escrow on the transaction will normally occur within 30 to 60 days.
Although HUD is not a lending institution, purchasers of HUD homes may qualify for FHA-insured mortgages. However, the buyer of a HUD home foreclosure is not required to use an FHA-insured mortgage to purchase the home.
The buyer can use conventional financing with either a fixed-rate or adjustable-rate mortgage (ARM) or the buyer can apply for an FHA-insured loan. These loans may permit lower down payments than other mortgage financing. You do not necessarily have to be a first-time home buyer to qualify under the FHA insurance program, but review the terms of the loan carefully to make sure you are eligible.
There are also VA loans from the U.S. Department of Veterans Affairs, another government agency that guarantees the lender against loss due to borrower default.
In some cases, an investor may qualify to assume the existing loan on the HUD home, allowing him or her to keep paying the same mortgage payments the previous owner was making before the foreclosure. However, if you work through an FHA lender to accomplish this, you will likely still undergo a credit review and other evaluations associated with obtaining financing. This is not necessarily what most real estate investors mean when they use the term “subject-to deals,” which also involve assuming the payments on a house. In a subject-to deal, the investor assumes payments but the terms of the loan, including the individual ultimately liable for the payments (the original borrower in most cases) do not change. Some lenders permit this type of assumption, while others do not and may call the loan due in the event that the transaction takes place. If you are not familiar with subject-to transactions, work with an experienced investor or real estate attorney on your first few deals.
OK. So you’ve hired a HUD-approved real estate agent or broker who helped you find the home of your dreams. It just happens to be a HUD home. HUD has accepted your offer; you’ve obtained financing, and now you’re ready to close escrow.
What’s next? What about all those little troublesome expenses called closing costs that typically add between 3 percent and 4 percent of the price of your new HUD home?
As mentioned earlier, it is possible HUD will pay your broker’s commission if you include this in the terms of your offer. Similarly, the agency may pick up your closing costs as well. However, like with the broker’s commissions, closing costs must be made part of the offer when the bid is submitted to HUD. Bear in mind that HUD is less likely to make these payments if you are an investor, so factor in the full closing costs when evaluating the deal just in case you have to pay them.
Should you choose to pay your own closing costs, it makes your bid more enticing to HUD and the chances of your offer being accepted will increase since HUD’s net return on the sale of the property will most likely be greater than if it had to pay those costs for you.
Buying a HUD home foreclosure can be a great experience for an investor, and it will help you get comfortable with the process of working with government entities to acquire properties for your investment portfolio. Just remember to be patient with yourself and the HUD representatives. Also, be prepared to move fast. You will likely be competing with other investors who are also aware of the great potential for solid returns that can be found in HUD home foreclosures. Educate yourself, prepare for action, and then, pull the trigger! Your successful real estate investing experience is right around the corner.
RealtyTrac is here to help you find and buy HUD home foreclosures and other investment properties whether this is your first deal or your 500th. Our vast database of national foreclosures, REOs, and bank-owned properties is perfect for helping you find the best real estate investment for you. Sign Up Now and take full advantage of RealtyTrac’s FREE Trial, which allows you to search our real estate inventory free for 7 days. The perfect investment property could be waiting for you right around the corner!