Buying an HUD Foreclosure
Department of Housing and Urban Development (HUD) REO properties are foreclosures that are available in every state in the United States. If a foreclosed home was purchased with a loan insured by the FHA, the lender involved can file an insurance claim for the balance due on the mortgage. FHA pays the lender's claim and transfers ownership of the property to HUD, which then sells the house.
You probably won't hear bank-acquired properties referred to as “REOs.” They'll simply be called “foreclosures” by lenders, real-estate agents, and others in the real-estate community.
HUD begins by ordering an appraisal for the house, which helps them price it at fair market value for its location. HUD homes are sold as-is, so if the property needs repairs, the agency lowers the price to reflect the expense of projected repairs. HUD homes are sold with a guarantee of title that allows the buyer and new lender, if there is one, to purchase title insurance policies.
The Bidding Process
HUD foreclosures include many types of properties, such as single-family homes, duplexes and fourplexes, condominiums, and townhouses. They are sold through a sealed bidding process, and bids must be submitted on special HUD forms. Bids must be submitted through a real-estate agent.
HUD has a short initial offer period during which the first bids are accepted. Bids are collected, but they remain sealed until the offer period ends, then all are opened at the same time. If HUD accepts one of these bids, it's the one that best covers HUD's investment in the property. If no bid is selected during this first round, all future bids are opened as they are received.
The winning bidder is usually notified within a day or two after bids are opened, and settlement is scheduled to take place thirty to forty-five days from the date of acceptance. A buyer can sometimes buy additional time by paying extra fees to HUD. If the buyer fails to close, HUD can keep the buyer's earnest money deposit, so don't bid on a HUD home unless you're sure you can get the funds to purchase it.
When awarding bids, HUD looks at the bottom line — its net proceeds. Bidders asking for fewer monetary concessions have an advantage. One way to help the bottom line is to negotiate lowered commissions with the real-estate agent who is submitting the bid.
Can Investors Bid on HUD Properties?
Investors are not allowed to bid during the first offer period because HUD prefers to sell its homes to owner-occupants. If an owner-occupant is not found during the first round of bids, investors are allowed to enter the process.
HUD is concerned about fraud regarding owner occupancy. This is so true that they ask bidders who purchase a property during the initial offering to sign a statement that they have not purchased another HUD home in the previous twenty-four months and that they will occupy this home for at least twelve months. The real-estate agent must also sign a statement verifying that he has no knowledge that the buyer is an investor.
Won't Home-Buyers Snap Up All the Deals?
Maybe not. The price range that HUD homes typically fall in is attractive to first-time home-buyers, but the properties are sold as-is, which often alarms inexperienced buyers. Inspections must be done before the bid is placed, with no guarantee that a bidder will win. Spending several hundred dollars for inspections without being sure the house can be bought is more than many people are willing to do, especially when funds are tight.
That means fixer-upper foreclosures are often left for investors who are accustomed to dealing with repairs. But don't assume there won't be competition for the properties — there are plenty of investors out there who are looking for the same thing you are.
As required by federal law, HUD allows a contingency for buyers who want to perform lead-based paint tests on structures built prior to 1978. Read more about lead paint hazards in Chapter 8.
Finding HUD Homes
Talk to local real-estate agents to find someone with plenty of experience dealing with HUD foreclosures. If you can't find someone with existing experience, try to find someone who you think can learn the procedures quickly, keeping in mind that agencies must be registered with HUD before they can submit bids. If a property is hot, you might only have one shot at buying it, because incorrectly submitted bidding packets are discarded.
HUD provides links to current properties on its Web site. Links lead to homes categorized by state, and from there you can narrow your choices down to specific cities and towns. You'll find HUD's Web site address, along with many other helpful resources, in Appendix C.