Investing with HUD Properties
What Is HUD?
The United States Department of Housing and Urban Development, often abbreviated HUD, is a Cabinet department of the United States federal government. Although its beginnings were in the House and Home Financing Agency, it was founded in 1965 to develop and execute policy on housing and cities. It has largely scaled back its urban development function and now focuses primarily on housing. Another program the department offers is sponsoring mortgages so that low- to mid-level income individuals can purchase a home.
HUD Auctions
A HUD auction is a form of foreclosure auction except the original lender was a federal agency instead of a private lender. The United States Department of Housing and Urban Development (HUD), is the insurer of loans made through a variety of government programs, particularly FHA loans. When a lender forecloses on a government insured loan, HUD takes possession of the property.
Buyers of HUD homes as their primary residences are given first priority. Those who make a full-price offer to HUD using FHA-insured mortgage financing receive seller concessions from HUD enabling them to use only $100 down payment. If the properties are not sold to an owner-occupant, investors and others may bid on them.
HUD homes are available in nearly every state. Though they take some research and commitment, they can be a great deal for investors. If you’d like to invest in HUD properties, the auction process is different from a public auction or trustee’s sale. Here’s the general process you will follow:
- Begin by searching through the HUD listings to find available properties in your state/county. Drive by the property to see the condition of the property and check out the neighborhood. Chat with the owners or neighbors if they are available. There are several benefits to talking with locals, they may have a wealth of information about the property (and hidden problems) and/or you may be able to make a deal with the homeowner prior to the auction.
- Check the status of the auction. HUD homes are first made available to owner-occupant buyers. They must live in the home for 12 months after purchasing. If no one places a bid that is accepted, then the property is opened up for investors to bid on. A new auction date will be set and you will need to place your bid prior to this date.
- Gather information about estimated market value and any additional liens. With the help of your real estate agent and research, you can determine a realistic market value of the property which will help you decide on your maximum bid amount and determine if the opening bid amount is a bargain. Visit the county recorder’s office to find out how much is still owed on the property as well as any additional liens that may be attached to the home. While some liens may be removed from the property, others (such as tax liens) will have to be paid by the buyer after winning the auction.
- Find a HUD approved real estate agent. You will need an agent to navigate this process for you and they must be HUD real estate agents (most of them are).
- Get a letter of pre-approval or pre-qualification from your lender. You will need to submit this letter prior to placing a bid to prove that you have funds available to pay for the property. A pre-approval is a more timely process as the lender requires more information as they approve you for a certain amount. This is a comfort when bidding as you are sure to have the funds available when you win the bid.
- Complete an application packet. Your real estate agent will help you complete this packet and submit it prior to placing a bid on the property. Information for this packet includes your bid amount, personal information and several disclosures.
- Present an earnest money deposit. Prior to placing a bid on a HUD home, you will be required to give an earnest deposit to your real estate agent. This is a certified check or money order for a pre-determined amount (usually $500 to $1000). If you do not win the property, this deposit is returned. However, if you win the property and fail to fulfill your obligation to purchase the property, this money is not returned.
- Take possession of the property. If you are the winning bidder, get all the necessary documents to show that you have won the property. The auctioneer and a real estate attorney can help you determine the next steps to take over the property. The time frame for this varies from state to state and can last from a few days to a month. Some properties also have a redemption period where the homeowner can pay the delinquent amount along with processing costs and regain possession of their home. If this is the case with your property, avoid making any changes to the property until the time has passed.
- Eviction of occupants may be necessary. In some cases, the trustee will evict the residents. If you are responsible for this, contact a real estate attorney or the county sheriff to find out the procedures for your state/county.
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