HUD Home Secrets! - How to Profit with Government Owned Homes - Part 2 Earnest Money
Before a bid can be submitted, the buyer is required to have on deposit with the real
estate broker an earnest money deposit. Earnest money must be in the form of either a
cashier’s check or money order. If the purchase price is $50,000 or less, the buyer is
required to deposit $500. If the purchase price is greater than $50,000, the buyer is
required to deposit $1,000.
If the buyer’s bid is rejected, the earnest money deposit will be returned. Should the
buyer have an accepted bid and not be able to buy the home, HUD will return the buyer’s
earnest money on the following conditions:
Owner-occupant buyers: The entire deposit will be returned if it is requested in writing
and adequate documentation is included when:
1) There has been a death in the immediate family,
2) There has been a recent serious illness in the immediate family that has resulted in
substantial medical expenses, income loss or adversely affecting the buyer’s ability to
purchase the home,
3) There has been a loss of work by the primary wage earner or substantial loss of
income at no fault of the buyer or
4) There is good cause as determined by HUD.
However, the buyer forfeits 100% of the earnest money deposit when he or she fails to
submit adequate documentation in the situations listed above. A buyer may be eligible
for 50% of the earnest money deposit when he or she is unable to qualify for a mortgage
for an uninsurable (UI) property.
Investors: The entire earnest money deposit is forfeited, regardless of the reason. The
investor may be eligible for 50% of the earnest money deposit if it is determined that the
investor is an unacceptable buyer of an insurable (IN) property.
Before deciding on which home to bid on, it is important for the buyer to sit down with
his or her HUD approved real estate agent and discuss a strategy for buying the home.
This includes determining the market potential of the home, what costs (if any) HUD will
pay for the buyer and bid price.
Remember all HUD homes are sold "As-Is". HUD will not make any warranties or
guarantees about the home and the buyer is taking the home in its current condition.
HUD will not make any repairs on the property.
As stated in the required purchase contract, the buyer has 15 days to conduct a home
inspection on the property. All costs for the inspection are the sole responsibility of the
buyer. That includes hiring a competent inspector and turning on the utilities to test the
various systems of the home.
A buyer may not make any repairs to the property prior to the close of escrow. In
addition, the buyer is not allowed to move any of his or her possessions into the home
until after the close of escrow.
45 Days to Close
All sales must close within 45 days of acceptance of the winning bid. Should the buyer
need to extend the closing date, HUD must approve the extension. Extensions are
granted in 15-day increments and only one extension is allowed. HUD charges a fee of
$10.00 to $25.00 per day (depending upon the sales price) to extend the close of escrow.
If the extension is approved and the purchase of the home fails to be completed by the
new extension date, the buyer will forfeit the extension fee, regardless of the reason.
Remember HUD homes are sold by bid. A real estate agent must submit your bid for you.
The agent submits the bid by computer. Normally, all of the desirable HUD Homes are
sold in the "Offer Period."
If the home isn't sold in the initial Offer Period, you can submit a bid until the home is
sold. These bids can be submitted any day of the week, including weekends and
holidays. They will be opened the next business day. If your bid is acceptable to HUD,
your real estate agent will be notified, usually within 48 hours.
Keep Trying
Your best chance at a property is at the main bid opening at the end of the first 5-day
period. Many of the best homes receive multiple bids and are quickly snapped up. Often
buyers are bidding more than the current market value of the home. You must have
carefully researched your target property to get a bargain buy here. But… some houses
receive no bids or all bids are rejected as too low or improperly submitted. Those homes
are still for sale. Now you have a better chance to buy at below market value.
Extended listings can be a source of good buys. If the house doesn't sell as an extended
listing after three weeks or so, HUD may reprice it and offer it again in the 5-day and 10day
bid period.
Experienced Agent
It's important to find a real estate agent that is experienced in HUD procedures. HUD
policies change from time to time and you want an agent who can give you good
guidance. Even though the homes must be sold for as close to market value as possible
HUD sometimes offers other incentives to make buying attractive. You want an agent
who knows of any special incentives and how to use them.
Your real estate agent will guide you through the paperwork process. You'll be given a
settlement date, normally within 30-60 days, by which you need to arrange financing and
close the sale, or forfeit your earnest money deposit, or pay for an extension of your
sales contract.
When you buy a HUD Home, the selling agent's commission will be paid by HUD but only
if you make this a condition of your offer. Your knowledgeable agent will be sure to ask
for a commission. HUD always pays the listing agent's commission up to 6%. You can
ask your agent to help you make the winning bid by asking for less than a 6%
commission. In the bid he may indicate a 2% or 3% commission is requested. That will
allow a higher net figure to HUD and give your bid a better chance buying the property.
More on this later.
Down Payment
Most people know that a down payment is a percentage of the price of the home that
must be paid up front, in cash. Many people don't know that HUD can reduce that down
payment from the 10% to 20% to a much more agreeable figure of 3%, or even less! On a
$50,000 home, that’s a down payment of $1,500 versus $5,000 or $10,000. This is
assuming you arrange for a FHA insured mortgage loan before submitting your bid. Talk
with a mortgage broker about what type of loan will be best for you at the time.
Closing Costs
This term covers various fees your lender charges for providing your loan, and other
expenses. Closing costs typically add up to about 3% or 4% of the price of your home.
But when you buy a HUD Home, HUD often picks up these costs--if they are specifically
requested, by a dollar amount, in the sealed bid offering. If you buy a HUD Home, HUD
may pay many of your usual and customary closing expenses plus real estate sales
commissions up to 6%.
Just remember that closing costs and sales commissions are deducted from the bid
amount when HUD calculates the net price it will receive. If you know there will be
competitive bids on an attractive property don't ask HUD for closing costs. This makes
HUD's net return greater; making your bid more favorable and increasing the likelihood
that HUDD might accept your offer.
Good Buys
HUD homes can be a good investment for potential homeowners and real estate
investors. Sometimes the properties can be purchased at a significantly reduced market
value, especially if they move past the first 10-day listing period. BUT… to find the good
buys you must shop carefully, research fully and know how to play the game. Quick,
impulse buys can be very costly.
You Must…
As a potential HUD homebuyer, remember the following:
•
You must use the services of a HUD registered real estate broker.
•
You must be pre-approved for a mortgage or show evidence of adequate cash
reserves to purchase the home.
•
Owner-occupied bidders receive the first priority to purchase HUD homes.
•
HUD offers three types of properties: FHA insurable homes, FHA insurable homes
with a repair escrow and homes that are not insurable with an FHA loan.
•
You do not have to finance a HUD home with an FHA loan.
•
HUD homes are sold "as-is".
•
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.
•
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.
•
Your earnest money check should be made payable to the escrow account of your
HUD registered real estate broker.
Should you be fortunate enough to have a successful bid on a HUD home, HUD allows
the buyer only 15 days after the date of acceptance to have all inspections completed.
The buyer may have the utilities turned on at their own expense for an inspection. 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. |
