Buying a HUD Foreclosure Home
HUD foreclosure homes can make great investments – and amazing
bargains – when you understand how their particular real estate
market works. A HUD foreclosure home – or “Housing and Urban
Development foreclosure home” – is a home that was last bought with
a mortgage insured by the Federal Housing Administration (FHA). When
the borrower defaults on their mortgage, the FHA pays the mortgage
lender what’s owed and repossesses the home. The FHA then appraises
the property and puts it on the market. This foreclosed home is
considered a HUD foreclosure, as the FHA Is part of the larger
government organization, HUD.
This total process takes 6-12 months, and during this time the HUD
foreclosure home is unoccupied. This is long-term vacancy is largely
the reason why HUD foreclosure homes are sold on an “as-is” basis.
Because the home is unoccupied for more than half a year, the
utilities are shut off. Until rather recently, these HUD foreclosure
homes were appraised while gas, water, and electricity were not
running, making a realistic appraisal – taking in account plumbing,
heating, etc. – difficult. While this practice has changed, it’s
because of this past appraisal situation that HUD foreclosure homes
are sold “as-is.”
Because of this “as-is” condition, make sure you’re aware of
whatever repairs the HUD foreclosure home may need. Never take on
any property that needs repairs you can’t afford to make, but be
aware that a HUD foreclosure home in need of over $5,000 of repairs
qualifies you for a FHA 203K loan. Similar to a private construction
loan, 203K loans allow you to bill yourself for hours you work on
your home.
HUD foreclosure homes can be great deals, but as in any investment
you should understand the risk you’re taking. This is especially
true with HUD foreclosures, as the properties sell “as-is,” without
warranty. The risk is hardly without reward, though: prices are
naturally adjusted considering what repairs may be needed, and HUD
may offer incentives such as an allowance to upgrade the foreclosure
property, an allowance to cover moving costs, or a bonus for closing
the sale early. Also, on most sales you can ask HUD to pay all of
the financing and closing costs. And if you’re a teacher or a law
enforcement officer, you may qualify for a 50% discount on your HUD
foreclosure home.
Working with a Good Real Estate Broker
A skilled real estate broker should help you negotiate an offer,
estimate the property’s utilities expenses, and shop around for a
mortgage. When buying a HUD foreclosure home, you’ll want to find a
real estate broker that’s especially experienced in foreclosures and
registered with HUD. Even if you’re practiced in real estate and
your portfolio is already underway, you’re required to use a real
estate broker to submit your bid for a HUD foreclosure home. You can
search for this real estate agent on- or off-line, and even when
you’re introduced to a real estate agent in person, be sure to check
their references.
Find a Mortgage Lender Familiar with HUD
While HUD doesn’t directly loan money, they have a number of
mortgage insurance programs you may be interested in, so search for
a mortgage lender familiar with HUD foreclosures. And if you’re
investing in a HUD foreclosure home in need of over $5,000 worth of
repairs, ask your lender about the FHA’s 203k loan. A 203k loan is
low money down, and finances both the purchase price of your HUD
foreclosure home and the costs of its repairs.
Making a Bid
Once you’ve found the HUD foreclosure home you want, decide on an
offer with your real estate broker and have them submit your bid.
HUD homes are put on the market in an initial “Offer Period,” and at
the end of this period all offers are opened and the highest bid is
accepted. (Note: HUD tends to place priority on owner-occupants over
real estate investors.) If the HUD foreclosure home isn’t sold
during this period, you can continue to bid until it’s purchased.
Bids are accepted any day of the week, and if an offer is made
during the weekend or a holiday, it will be opened the next business
day. If your bid is acceptable, your real estate agent will be
notified in about two days. If your bid is accepted, you’ll be given
a settlement date – usually within 30-60 days – and this is your
deadline to find financing and close the sale.
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