Although most foreclosure specialists will work to find you a good deal, potential conflict of interest does arise in the sale of HUD homes. First, if you do not submit a winning bid, your sales agent does not earn a commission. An unethical agent could pressure you to raise your bid even if the value of the property doesn't justify a higher price. Second, sales agents may submit bids from competing buyers who are bidding on the same property. If you bid $80,000, an agent could tell another more favored buyer to bid $80,100. You lose. Third, HUD typically pays brokers who submit a winning bid a 5 percent sales commission plus, on occasion, a $500 (or more) selling bonus for designated properties. Again, this reward may encourage the agent to push you to bid high.
Although you should not unjustly insinuate that your agent is likely to engage in underhanded sales tactics, it is smart to ask your agent how he handles these potential conflicts.
When hard times hit, HUD foreclosures accumulate to unmanageable and costly numbers. To reduce this big inventory of REOs and create quicker sales, HUD may offer buyers easy financing, cash bonuses, and steep discounts. If unsold HUD properties pile up in your area, you might land a particularly good deal.
The Bid Package
As might be expected of a government agency, HUD doesn't make its buying process simple. Unlike a private purchase, where you simply write out your offer on any valid contract form, HUD requires a specific contract submission package. You must use only HUD-approved forms and documentation. You must complete all of the required forms, addenda, and enclosures fully and accurately. In addition, your contract package must arrive in HUD's regional office according to HUD's posted schedule.
HUD may (and does) refuse to accept bid packages that do not conform to its instructions. Given HUD's well-known inflexibility, work only with conscientious foreclosure pros who know in detail the ins and outs of HUD's requirements.
Department Of Veterans Affairs (REOs)
To sell its foreclosed properties, VA follows rules similar to those of HUD. For example, here are 12 major ways the programs resemble each other:
1. The VA sells through a sealed bid process. Likewise, as either a potential homeowner or an investor, you may submit multiple bids during the same bid period.
2. You cannot directly negotiate with, or submit a bid to, the VA. You must submit your bid through a VA-approved broker (your foreclosure pro).
3. The VA sells its homes on an as-is basis. Even though it may partially disclose a home's defects, it offers no warranties. Caveat emptor.
4. The VA does guarantee title, and it permits buyers to obtain a title policy.
5. The VA accepts bids that yield it the highest net proceeds (not the highest price). If you agree to pay closing expenses or sales commissions, you can win the bid over others who offer higher prices, but pass these costs (a lower net) on to the VA.
6. Just as HUD/FHA charges FHA buyers an insurance fee, the VA charges buyers who choose its financing a guarantee fee of around 2 percent of the amount financed.
7. The VA accepts bids only on VA forms. Errors in completing the forms may invalidate the bid.
8. The VA publicizes its homes through a combination of newspaper ads, broker lists, and Internet postings. You can access VA REOs from hud.gov.
9. Local VA offices report to regional directors, who may issue policies and procedures that differ from those in other regions throughout the country.
10. The VA may choose to keep your earnest money deposit if you fail to close a winning bid for any reason other than inability to obtain financing.
11. As with HUD sales contracts, VA purchase offers do not include a contingency for post bid property inspections. You may, though, inspect a property before you bid.
12. When necessary, the VA evicts holdover tenants or homeowners before placing a VA home on the market. At closing, you will receive a vacant property.
Big Advantages for Investors
Although in many ways the VA follows rules similar to HUD, it differs in two important ways that work to the advantage of investors:
1. The VA does not give owner-occupant buyers preferential treatment. The VA looks for the highest net offered by any credible buyer-homeowner or investor.
2. The VA offers financing to investors on quite favorable terms. At present in my area, for example, investors can close financing on a VA home with total cash out-of-pocket of less than 6 percent of a property's purchase price. In addition, the VA typically applies "relaxed" qualifying standards. VA buyers (who need not be veterans) must show acceptable, not perfect, credit records. (For specifics in your area, talk with your foreclosure pro.)
With such favorable terms of financing, VA homes in good (and even not so good) repair frequently sell at top-of-the-market prices. However, many investors still find the program attractive for these three reasons:
1. High leverage permits you to accelerate your wealth-building returns.
2. Even at top-of-the-market prices, many VA homes pull in rents high enough to provide a positive cash flow from day one of ownership.
3. The VA allows future buyers to assume your VA financing. For investors who want to "fix and flip," an assumable loan makes a great benefit. Plus, in periods of high interest rates, a lower-rate assumable VA loan gives your sales efforts a big advantage.
Overall, VA homes provide an excellent source of properties and financing for beginning and experienced investors alike. Make sure you investigate this opportunity.