How to buy HUD Homes?

Real Estate Broker/Owner with Signature Real Estate TREC# 516948

This is one of the questions our prospective clients ask us most often. So it was only natural to include it in our Real Estate Investing Guide.


What are HUD Homes?

Along with conventional mortgages, the federally insured (FHA) loan program is one of the most commonly used financing options for residential real estate in the United States. When a loan is made under this program, the U.S Government vouches for the borrower and insures the lender against potential loan default. When the homeowner defaults on an FHA mortgage, the lender forecloses on the property and subsequently “cashes in” their insurance policy with the government. So, the lender gets their investment back, while the government takes ownership of the property. Being that the government is not in the business of owning real estate, it will try to liquidate these properties  in the open market in order to recuperate their investment. The department that handles the liquidation process within the U.S Government is the Housing and Urban Development (HUD). Hence the name, HUD Homes or Government Foreclosures.

How does the process work?

New properties are listed every week on Friday with the auction deadline the following Sunday. During this 10 day period, prospective buyers (investors and otherwise) would get an opportunity to see the property if they’re accompanied by a HUD Approved broker that can grant them access to the entire HUD inventory. Once a decision has been made to bid on a property, only an approved broker (agent)  can place a bid on your behalf. In order to place a bid, the HUD approved agent will need your full legal name, address, phone number, social security number and offer amount. Bid is entered electronically and no contracts are signed at this point. Also, the timing of bid submission does not favor or hinder your chances of winning the bid. As long as the bid is entered prior to the deadline, all offers are considered at the same time, Monday morning. However, HUD’s mission is to promote home ownership first and foremost, therefore they will favor homeowners over investors, to a certain extent.

If your bid wins, then your agent has 48 hrs to get an original executed contract package to the HUD office so time is truly of the essence. Your contract package is not complete until it includes a pre-approval letter from a mortgage company or a bank, so it is recommended that you secure a pre-approval first, before you start your search. They will also require $1,000 earnest money (if price is over $50,o00) in a cashier check.  Once the contract is executed by HUD, the buyer has 45 days to close the transaction (if they’re getting a mortgage) or 30 days if paying cash. However, be careful! As part of their standard procedure, HUD requires closing documents at the title company 7 business days prior to closing so truly you have about 35 days to close. Once time comes for inspections, HUD will not turn on the utilities for you - But they will allow you to turn them on in your name if you submit a written request. For investors, the inspections are for informative purposes only - regardless of the findings, you will forfeit the earnest money if you walk away from the deal. The executed contract will then be forwarded by your agent to your mortgage person, so they can move forward with processing the loan. Upon final approval and issuance of closing documents, the title company will then schedule a closing time and consummate the transaction after which the property is a HUD Home no more. It then belongs to you, for you to do with it what you wish (see: renting).

How are they different from bank foreclosures?

In most aspects, they are not different at all. They are sold “as is” with title insurance and right of inspections. The differences are in the process by which they are liquidated. Like bank foreclosures, HUD Homes are listed on the Multiple Listing Service by designated brokers working for HUD. However, unlike bank foreclosures, they are sold through an electronic bid auction system. As stated earlier, the timing of the bid is not a factor with government foreclosures while it is crucial in bank foreclosures. Lastly, the process is much more transparent with HUD Homes in that they allow you to see the bidding results as soon as a decision has been made so you can determine why you won or lost that particular bid.

Are all HUD Homes great deals?

As with all types of foreclosures, HUD Homes are not all investment grade, at least not right away. A percentage of HUD Homes are great deals from the moment they are first listed on the market. Some others may not make great investments right away, but as they sit on the market, HUD’s price flexibility grows and their price reductions are often sufficient to make a mediocre deal into a steal. And of course, some of them are never good deals. The way you can tell as a buyer, is to work with a pro that has extensive experience in dealing with HUD Homes and knows the process well.

Where can I get the list?

If you are looking for HUD Homes outside of Houston, head here, enter your criteria and you will get to see all the matching homes currently available. Or visit the easy to navigate site with weekly updated listings for Houston HUD Homes. For any properties you find interesting, you can request complimentary research of market value, sales and rental comps, tax records, cash flow breakdowns and more.

P.S If there’s anything additional you’d like to know about HUD Homes or the process by which they are sold, please comment on this post and I will edit the post for all to see.


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