So you’ve been shopping around for a new investment property, and you’ve been wondering about HUD homes. They seem like a no-brainer for an investor; multi-unit properties at a great price. But what’s the catch? Let’s take a look at the benefits and challenges associated with purchasing HUD properties.
What exactly is a HUD home?
HUD stands for the U.S. Department of Housing and Urban Development. Specifically, a HUD home is a 1-4 unit residential property that has been acquired by HUD because of a foreclosure action on an FHA-insured mortgage. HUD then becomes the official owner of the home and attempts to sell it to recover the loss on the foreclosure claim. However, before you get excited and go hunting for an HUD home, there are a few things you should know.
What’s different about buying a HUD home?
Unlike purchasing a home from a private owner or a bank, you’re purchasing a home from a government agency. Not surprisingly, that means everything about the purchase is very process driven. The sale is managed by HUD hired asset management companies throughout the country. These companies often have slightly different policies, but the general process usually remains about the same.
Here’s what you can expect:
- You need to use a HUD certified buyer’s agent:
Your agent or broker will need to be registered for HUD and will need to have a government issued NAID number.
- You can browse the HUD home store anytime:
To find currently listed properties in your area, go to www.hudhomestore.com and run a search.
- Owner occupants get first dibs:
HUD homes have an exclusive listing period, at which time any owner occupants can submit bids for the property. After the exclusive listing period has expired, bids from the general public can be submitted.
- Your have to put earnest money on the line:
HUD doesn’t like spending time on flaky buyers, so they require an earnest money deposit to make sure potential purchasers have some skin in the game. The amount of earnest money lost depends on the reason that the deal fell through. For example, if a loan is denied, you’ll get half your earnest money back, whereas if the home is damaged or vandalized after the contract is accepted, you can get a full refund.
- You will be paying for title insurance:
Figuring out title insurance for the property is entirely up to you, so be prepared for that extra expense.
- If the property needs repairs, you have to wait until after closing:
HUD properties are sold as-is with no warranty. As such, repairs are not to be performed on the property until after the new owner has taken possession.
- You can get a loan for extensive repairs on eligible properties:
The 203K program allows buyers to purchase a HUD home that requires extensive repairs and finance those repairs into a government backed loan. Homes flagged as eligible for 203K loans have significant enough problems that they don’t meet the minimum property standards defined by HUD.
- You have multiple financing options:
You can use FHA or conventional financing to purchase a HUD home. You may also purchase a property with cash.
- You will be working with two specific HUD representatives:
You’ll be interacting with the Field Service Manager (FSM), who is responsible for property maintenance and preservation to coordinate inspections, etc. You’ll also be working with an Asset Manager (AM), who is a contractor hired by HUD to market and sell the property.
- You can get a great deal:
HUD homes usually have very favorable pricing which is why competition can be fierce. Generally it’s best to bid early. If you do come across an older HUD home, you can enjoy lower prices as HUD homes are typically reduced after 60 days on the market.
- You need to know your stuff:
The government owns HUD and you can be fined up to $250,000 for not following their rules and procedures.
Though HUD homes do have some drawbacks and require a more complex process to purchase, you can get a great deal on an investment property. Just make sure you take the time to learn your stuff before you start bidding so your fully prepared for the process.