HUD homes: Save big money by buying foreclosures
Posted
Jul 16 2008, 07:20 AM
by
Karen Datko
Rating:
This post comes from partner blog The Dough Roller.
If you are in the market to buy your first or next home, a HUD home could potentially save you tens of thousands of dollars on the purchase price. But there are some things to watch out for.
In this article, we'll cover the basics of buying a HUD foreclosure home and some tips on getting the lowest possible price.
HUD homes
HUD homes are one- to four-unit residential properties acquired by the U.S. Department of Housing and Urban Development as a result of a foreclosure on an FHA-insured mortgage.
The condition of HUD foreclosures can vary substantially. I've been in some homes that reminded me of the final scenes in "The Silence of the Lambs." Some homes, however, were in near move-in condition. Some HUD homes were built just a few years ago, while others are 50-plus years old. Finding the home that's right for you will take some work, but your willingness to buy a home that needs some repairs and improvements presents an opportunity to buy a home at a big discount.
It's also important to understand that the availability of HUD housing varies from location to location. Fortunately, HUD and its property-management contractors offer a convenient way to search for homes online.
HUD homes online
On the HUD Web site you'll see in the left sidebar a link to HUD homes. This page provides links to all 50 states and the District of Columbia. Because HUD contracts out the management of its properties, those links will take you to the Web site run by the property-management company for the state you select. For this article, we'll take a look at Ohio properties, which are managed by National Home Management Solution.
Each property-management Web site offers four categories of information you should know about:
HUD homebuyer information. It provides information on how to buy a HUD home and on buying your first home. Links to this information typically point ba
ck to the HUD Web site.
HUD home search. It provides a means to search for homes by city, county and ZIP code.
While the format of the search results varies from one management company to the next, the next screen shot from HUD homes in Ohio is typical and gives you an idea of the information that is available.
From the listing, you can then look at detailed information about each home:
At this listing, you can read an inspection report about the home and details about the home as provided by the management company.
HUD housing bid results. Bid results and bid statistics (discussed below) are two critical data points for predicting the minimum bid price HUD will accept for a given home.
It's critical to recognize that the list price for a HUD home is almost never the price you'll pay. For my investments, I've bought homes for anywhere between 60% and 87% of the list price. Knowing what HUD's minimum acceptable bid is takes a lot of trial and error. I probably bid on 15 HUD homes to get one. But over time, you learn how low you can bid to get a home.
Bid results show you the amount of winning bids. From this you can compare the list price of the home with the winning bid price.
Bid statistics: Unlike bid results, bid statistics shows you all bids on a property (both the winning bid if any, and all losing bids). Coupled with bid results, bid statistics represents extremely valuable information to study when evaluating a HUD home.
Owner-occupied HUD homes
As a buyer who will live in the HUD home, you get several advantages over investors. First, you get to bid on the home first. In the listing of homes, you'll see the designation "owner occupant," which indicates that the home is open for bids only from those who will occupy the property. After about two weeks, if no acceptable bid is made, investors can bid on the property.
Second, HUD provides a number of incentives for owner-occupied buyers. Those incentives can change, but typically include assistance with closing costs (currently $2,500), ability to borrow more than the cost of the home to fund needed repairs and improvements, and low down payment financing.
Using a Realtor
Only licensed real estate agents can submit a bid for a HUD home. My strong advice is to find a Realtor that has a lot of experience buying HUD homes. There is definitely an art and science to bidding on these foreclosures, and I've seen homeowners bid way too much for a HUD home due to inexperience. A Realtor with experience investing and improving HUD foreclosures would be ideal.
Final thoughts
I've bought five HUD homes as real estate investments, and the fifth one was just this week. It is a three-bedroom, one-bath home for which I paid about $40,000. The list price was $65,000. We estimate that improvements will cost $15,000, and we can either rent the property for about $745 a month or sell it for about $85,000. Either way, it should turn out to be a great investment.
Buying a HUD home for yourself can be equally rewarding. If you've bought a HUD home before, share your experience with us. And if you have any questions, just leave a comment or send me an e-mail.
Other articles of interest at The Dough Roller:
Is flipping houses investing or speculating?
The 1% solution to real estate investing
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