How To Buy A HUD Home
With the shortage of homes for buyers to choose and make offers to purchase, many are looking to HUD homes as opportunities to get into affordable housing. What are HUD homes? HUD homes are houses acquired by the U.S. Department of Housing and Urban Development (HUD). If a foreclosed home was purchased with a loan insured by the Federal Housing Administration (FHA), the lender files a claim for the balance due on the mortgage. The FHA pays the claim, then transfers ownership of the property to HUD, which sells the home. The properties include single family homes, townhouses and condos, and often are in poor condition.
How much is a HUD home worth? Who sets the price? HUD homes are priced at fair market value for their location based on appraisal. If the home is in need of repairs, the price is adjusted according to the cost of repairs the buyer will have to make. HUD homes are typically less expensive than regular houses, so buyers can get more space for less money. Teachers and police officers are given a 50 percent discount on HUD homes. Investors often purchase HUD homes to fix up themselves and sell at a profit. HUD homes are sold as-is – HUD is not responsible for repairs and improvements.
How do you find available HUD homes that are for sale? You can view HUD listings on their Web site at www.hud.gov/offices/hsg/sfh/reo/homes.cfm. There are links to each state’s particular HUD web site. The HUD and state Web sites list agents who work with HUD homes, because only a registered HUD real estate broker can show you a HUD property – you can’t buy it without going through one of these agents. You may also see properties for sale with a HUD sign in the window.
How do you go about making an offer to purchase a HUD home? The buying process on a HUD home is different from the usual residential real estate transaction. HUD foreclosures are sold using a bidding process. There's an Offer Period, during which sealed bids are accepted from agents – no bids from private buyers are accepted. When the period is over, HUD accepts the highest bid. Unlike conventional home sales, there is no negotiating on price between buyer and seller.
If your bid is accepted, your agent is notified, and you’re given a settlement date, usually 30-60 days from the date of your accepted contract. HUD pays real estate agencies up to 6 percent commission for the sale of the home, but only if specific wording is added to the contract verifying that HUD will pay commission. This is one reason among others that it is important to work with an agent who is familiar with HUD homes and the buying process.
Here is another reason to have a seasoned real estate agent: Before submitting a bid, buyers must be pre-approved for financing. You must make application and have a conditional loan commitment from a qualified lender. Since HUD itself does not provide financing, you must arrange for conventional financing. Again: your financing must be in order before you make a bid, because if your bid is accepted, and your financing falls through, you’ll lose the earnest money deposit you made with the bid. If you plan to pay cash, you’ll need to provide sufficient evidence that have the means to purchase the home, such as a bank statement, deposit slip, or a letter signed by a banker.
The HUD home is purchased "as is" so a home inspection is imperative before any home purchase, but especially so for HUD foreclosures. There are repair issues as well as environmental factors – asbestos, buried storage tanks, lead paint. These factors will help you determine a bidding price, especially if repairs are required. If an offer is accepted, the buyer has 15 days to complete any inspections. Also, it is the buyer’s responsibility to pay for the utilities to be turned on. And again, if defects are found, HUD will not make or pay for the repairs. It will probably lower the purchase price, however.
Foreclosures not sold within six months are sold for $1 each to approved nonprofit organizations and government agencies. These homes are required to be used for housing for needy families, charitable enterprises or to benefit neighborhoods. And, as stated above, HUD offers foreclosed homes to teachers and law enforcement personnel for 50 percent off the purchase price.
As a potential HUD home buyer, remember the following:
l You must use the services of a HUD registered real estate broker.
l You must be pre-approved for a mortgage or show evidence of adequate cash reserves to purchase the home.
l Owner-occupied bidders receive the first priority to purchase HUD homes.
l HUD offers three types of properties: FHA insurable homes, FHA insurable homes with a repair escrow and homes hat are not insurable with an FHA loan.
l You do not have to finance a HUD home with an FHA loan.
l HUD homes are sold "as-is."
l Before making a bid on a HUD home, you must provide your HUD registered real estate broker with the appropriate earnest money in the form of a cashiers check or money order.
l If the purchase price is $50,000 or less, the amount of the earnest money required is $500. If the purchase price is greater than $50,000, the amount is $1,000.
l Your earnest money check should be made payable to the escrow account of your HUD registered real estate broker.