HUD Home Secrets! - How to Profit with Government Owned Homes - Part 1 Part One
Introduction to HUD Home Opportunities!
Yes! If you're looking for the opportunity to buy a home at a bargain price you may
find it with a HUD owned home. But it's not simple. Buyers must bid on homes.
The truth is people often submit purchase bids that exceed the market value of the
home. This manual will explain the HUD process and guide you away from the
mistakes. You can find bargains, but you must research the true value and
condition of any property that becomes your target. You must understand the
secrets of making winning bids. If you are patient and are willing to put in the time
and effort this manual can be your success guide.
What You Must Know About HUD Homes!
Also known as HUD, the U.S. Department of Housing and Urban Development was
established in 1965 to develop national policies and programs to address housing needs
in the U.S. One of HUD's primary missions is to create a suitable living environment for
all Americans by developing and improving the country's communities and enforcing fair
housing laws
HUD helps people by administering a variety of programs that develop and support
affordable housing. Specifically, HUD plays a large role in homeownership by making
loans available for lower- and moderate-income families through its FHA mortgage
insurance program and its HUD Homes program. HUD owns homes (acquired through
foreclosure) in many communities throughout the U.S. and offers them for sale within
certain guidelines and requirements. HUD also seeks to protect consumers through
education, Fair Housing Laws, and housing rehabilitation initiatives.
Now an agency within HUD, the Federal Housing Administration was established in 1934
to advance opportunities for Americans to own homes. By providing private lenders with
mortgage insurance, the FHA gives them the security they need to lend to first-time
buyers who might not be able to qualify for conventional loans. The FHA has helped
more than 26 million Americans buy a home.
The FHA works to make homeownership a possibility for more Americans. With the FHA,
you don't need perfect credit or a high-paying job to qualify for a loan. The FHA also
makes loans more accessible by requiring smaller down payments than conventional
loans. In fact, a FHA down payment could be as little as a few months rent. And your
monthly payments may not be much more than rent.
Lender claims paid by the FHA mortgage insurance program are drawn from the Mutual
Mortgage Insurance fund. This fund is made up of premiums paid by FHA-insured loan
borrowers. No tax dollars are used to fund the program.
There are opportunities for investors in HUD homes and this manual will explain how to
buy with the best chance for profit.
HUD Owns Homes
HUD is the Federal agency that oversees the resale of "HUD homes". HUD homes refer to
foreclosed properties that were conveyed to HUD when a homeowner failed to make
payments on their FHA insured mortgage. As a result, the government sells these homes
by bid in order to regain the financial loss due to the foreclosure.
A HUD home will generally fall into several types of residential real estate—single family
residence, townhouse, condominium and mobile home. The age and condition of a
typical HUD home will vary from property to property. Due to this diversity among the
current inventory of HUD homes, the government sells these homes "As-Is". In other
words, HUD does not warrant the condition of the properties. Though the buyer may shy
away from this lack of warranty, he or she should realize that these properties open up
the possibility of buying a home at an affordable price while maximizing the purchase
potential in the home.
HUD/FHA does not make mortgage loans. They insure mortgage lenders against loss. If
you buy a home with a FHA insured loan and find that you can no longer make payments,
the lender will foreclose on the loan and you will lose the home. HUD pays the lender for
any financial loss and takes over the home.
Before HUD homes are listed for sale, HUD orders an appraisal and property/pest
inspection on the house. This act establishes the current value for the home in relation to
comparable homes that have sold in the area, identifies any potential problems with the
home, and determines if there is any current termite or pest infestation.
Each HUD home falls into one of three categories:
1) an insurable property (IN)
,
2) an insurable property with a repair escrow (IE)
,
3) an uninsurable property (UI)
.
An insurable property (IN) is a home that meets the appraisal guidelines for a FHA home
loan. Most homes that fit within this category do not require major repairs outside of the
normal wear-and-tear a home suffers. Offers from buyers with other-than-FHA financing
(such as a VA home loan or a conventional loan) or cash buyers are acceptable for this
type of property.
An insurable property with a repair escrow (IE) refers to a HUD home that is eligible for
FHA financing if the total repairs required on the property total less than $5,000. As a
result, a repair escrow is established to cover the cost of repairs on the home.
A repair escrow is an account established upon the closing of the purchase of the HUD
home for the amount of repairs on the home as identified by HUD. After the close of
escrow, the lender will inspect the work as it is completed and distribute the money
within 90 days of closing. The money in the repair escrow comes from the buyer’s
purchase money financing.
It is important to note that a repair escrow is only offered to those homebuyers
purchasing the home with FHA-insured financing. If non-FHA financing is used to
purchase the home, the repair escrow does not apply. In other words, none of your
purchase money will be credited towards repairs.
Furthermore, HUD does not give the money for the home repairs to the homebuyer;
rather, the cost of repairs are included in the loan amount and repaid by the borrower as
part of the house payment.
Any additional money left over after the repairs have been paid are applied to the buyer’s
mortgage and not disbursed to the homeowner.
An uninsurable property (UI) is a HUD home generally needing extensive repairs and
deemed by HUD as not eligible for FHA financing in its current condition. Other-than-FHA
financing or an all-cash deal is required to purchase this type of HUD home.
In some cases, a property may be deemed "Insurable With Conditions" (IC). This refers to
properties classified as IN or IE that require a systems check, roof inspection, or other
property condition determined by the appraiser for an FHA home loan. The buyer
generally pays the inspection fees.
Once a home has been classified, it is offered for sale according to a specific listing
timeline. This timeline gives priority to owner-occupant buyers over investors for the first
10 days a home is listed. New HUD homes on the market are released each Thursday (in
most areas).
Every year HUD acquires thousands of homes, small apartment buildings and other
properties in every state. They must move these properties back into private hands as
efficiently as possible. But they face some problems. How can they offer these homes in
a fair and equitable manner?
They cannot flood the market with cheap homes, because that would drive down the
value of every home in the area and disrupt the orderly buying and selling of property. It
would also displease the real estate brokerage industry. Lower overall property prices
would mean smaller commissions.
If you have the cash or can qualify for a mortgage, you can buy a HUD home. HUD homes
vary in price, but most are affordable for low- and moderate-income buyers and
investors.
Can you buy a HUD Home for a dollar? No. Remember they can't disrupt the real estate
market. HUD sells homes at market value - that means that the price is set based on the
price of similar homes sold in the area. You will learn how to buy in a moment.
HUD Homes are sold "as-is," without warranty. That means that HUD will not pay to
correct any problems. But even if a HUD Home needs fixing up - and not all of them do you
might stumble upon a bargain. For example, HUD's asking price on the home will
reflect the fact that the buyer will have to invest money to make improvements.
HUD might offer (at times) special incentives such as an allowance to upgrade the
property, a moving expense allowance, or a bonus for closing the sale early. And keep in
mind that on most sales, the buyer can request that HUD pay all or a portion of the
financing and closing costs. Your real estate agent will have details.
Buying a home that needs fix-up work takes special skill. It sometimes happens that after
a buyer takes possession of the home they learn that repair costs will exceed the value of
the house. It’s “buyer beware” with HUD homes.
The AMB
Once a lender forecloses on a house that had a FHA loan, the lender must notify HUD
and the local Area Management Broker (AMB). The AMB manages these homes until
they're sold. The AMB will change the locks, put up the FBI warning signs to ward off
vandals (seldom effective), install lockboxes so the HUD qualified brokers can get in and
arrange for inspections and appraisals. The AMB will inspect the home, but will only do
any repairs necessary to eliminate hazards to the public.
The property is not yet ready to be shown. It must be properly advertised or listed before
a HUD broker can show prospective buyers the property. In some areas there will be
services that sell lists of home foreclosures. You can buy the list and occasionally it will
contain HUD homes before they are presented to the public.
HUD homes are often damaged or vandalized before the sale. AMBs bid competitively for
the right to manage HUD properties, so they can't afford to spend much (or anything) on
fix-up. With HUD homes it is always "buyer beware".
The AMB is responsible for checking the home for occupants, obtaining appraisals and
removing junk from the house. If occupied the local HUD field office will be notified and
eviction will begin. Water, gas and electricity are turned off.
Initial Report
The AMB must file an initial report on the inspection and condition of the property. The
report includes the total estimated cost of repairs, with a breakdown by general category,
such as the structure, including roof, foundation and walls. Also included are the
conditions of heating, air conditioning, electrical and plumbing.
This information is on file at the HUD office. Press your agent to try and get it. Knowing
the extent of repairs the home will need can effect your decision to bid.
Title
Be very careful about title when buying a HUD home. HUD can convey as good title as it
gets and it strives to get good title.
The foreclosing lender is responsible for conveying good and marketable title to HUD.
This may be done either by arranging for a title insurance policy or by obtaining a
certificate of title from an attorney.
HUD is able to solve most title problems before resale. It is a must that any homebuyers
purchase a policy of title insurance. HUD will not pay for the policy. HUD issues a special
warranty deed to buyers and that is not full protection from title defects…. so title
insurance is imperative.
Part Two
How to Buy a HUD Home
HUD classifies its property buyers into two categories: (1) owner-occupant buyers and
(2) investors. An owner-occupant is a person that will live in the home as his or her
primary residence within 30 days from the close of escrow. An investor is essentially
everybody else—people looking to buy real estate as an investment, someone looking for
a second home or someone who does not qualify as an owner-occupant.
Pre-approved For Loan
Before someone is eligible to purchase a HUD home, he or she must be pre-approved for
a real estate loan or have the cash on hand to purchase the property. Pre-approval is a
conditional approval given by a mortgage lender after a formal loan application has been
taken and the lender has verified the information provided by the borrower (such as
employment, assets, income, credit, etc.).
Though HUD does not provide financing for its properties, HUD does not restrict
homebuyers from the type of financing for a HUD home either. Understand that this
means you must find a lender and get loan approval on your own. HUD will not do that
for you.
All HUD owned homes must be purchased through a real estate broker. To shop for a
HUD home you must find a participating real estate agent. If you check your Yellow
Pages under Real Estate you should find ads for brokers who specialize in HUD homes.
Submit Bid
The process of buying a HUD home differs from a typical residential real estate
transaction. In a normal transaction the buyer finds the home he or she likes with the
assistance of a real estate agent and the agent presents an offer to the seller.
The seller may counter the offer and this process continues until 1) the buyer and seller
find mutually agreeable terms to close the deal or 2) the buyer or seller rejects the terms
and both move on to other opportunities.
When purchasing a HUD home, the process is through a sealed bid, computer managed
auction. There are no negotiations between the buyer and the seller. The home is sold to
the buyer making the "highest netting" acceptable bid. "Highest netting" means that
amount of money HUD actually receives after commissions and expenses are subtracted
from the bid.
The initial listing price of each property is HUD's estimate of current fair market value and
is based upon an appraisal conducted by an independent real estate appraiser. HUD may
accept an offer that's less than the listing price, depending on market conditions and the
length of time the property has been on the market. In some instances, buyers make bids
higher than the listing price, if they believe the market conditions demand it, or if the
home is particularly appealing, or if that don't have a good understanding of current real
estate values. It is important for buyers to be aware of the property values established by
HUD and the value of others homes in the neighborhood. It is not uncommon for a home
to be sold for more than its current market value. Don’t bid without researching area
values!
Listing Period
You will generally make your offer for a HUD Home during a designated "Listing Period."
With the commencement of the Initial Listing Period all potential purchasers may submit
bids. However, priority will be given to owner-occupant purchasers for the first 10
calendar days as follows:
1.) All owner-occupant offers received during the first five days of this 10 day period will
be considered to have been received simultaneously.
2.) On the first business day following the expiration of the five-day period, owner-
occupant bids are reviewed, at which point the highest acceptable net owner-occupant
bid will be accepted. Should there be no acceptable owner-occupant bids, owner-
occupant bids will be reviewed on a daily basis (that means at the bid deadline each day)
for the remaining five days.
At each such daily review, HUD will accept the highest acceptable net owner-occupant
bid and the bidding will be closed. At the conclusion of the 10-day owner-occupant
priority period, should the property remain unsold, a review of the general public bids
(including investor bids) received during the 10 day period will be conducted.
If the home remains available after 45 days, HUD may establish a lower list price or
minimum acceptable bid.
The bid deadline is 11:59 P.M. on the day of the bid deadline. Bids are reviewed the next
business day to determine whether an acceptable bid has been received. All bids must
be submitted through a HUD approved real estate agent or broker. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
