What is a HUD Home and Why Do So Many People Think They Want to Buy One?

Some people know what HUD homes are and some have no clue. A HUD home is a foreclosed home that had a federal government loan (i.e., an FHA or VA loan) backing it. These properties that are taken back are then put on the market as HUD homes and require a very regulated sales/buying process for both real estate agents and buyers alike.

First off, to even look at a HUD home you MUST use a HUD-certified broker. This is a federal requirement, not just a real estate agent wanting to make a sale. Not all brokers are HUD-certified. Most are not. A HUD-certified broker is the person who signs all the legal paperwork and contracts for an entire real estate company. Once you’ve identified a broker, then you must find an individual real estate agent who works for that broker. I would say 99.5% of real estate agents have no clue as to what a HUD home is, and it’s often a matter of the blind leading the blind. So, it’s important that you make sure your real estate agent has knowledge of the HUD process.

Next, your agent should be able to find HUD homes in your area to go take a look at. The problem is that the listing agents for the government rarely take more than one picture of the home, and so it can be difficult to really get a feel for the home without physically seeing it. This may require looking at a lot of HUD homes!

Once you’ve found one that you would like to bid on (which is done electronically by your agent), you must decide how much to bid. This is where things get downright tricky. First, let me explain how the bidding process works.

1. HUD places a home on the market and sets a listing price.
2. A 10-day period begins from the listing date during which bids can be placed. The bids remain sealed during this time. For those first 10 days, only owner-occupants can place bids. NO INVESTORS! If you place a bid pretending to be an owner-occupant but are really buying the property purely as an investment, I believe the government can take away the real estate agent’s license AND the buyer can face jail time with a felony charge. It’s a very serious offense to lie about owner-occupancy when purchasing a HUD home.
3. At the end of the 10 days, the bids are opened, and if the highest NET BID is acceptably high, the home will awarded to that bidder. All bids are AS-IS. No repairs are included. Things like real estate commissions, repair allowances, closing costs, down payment assistance, etc., are all calculated and written into the bid. The NET BID is what the federal government would receive a check for. The only part that doesn’t show is the listing agent’s fees, which they then attach to the bid after they receive it, showing a true NET to government. Real estate fees are up to the real estate agent and the buyer, and can be anywhere from 2-5%.
4. If HUD hasn’t received any acceptable bids after the 10-day period, the property is then opened to all parties — investors and owner occupants.

Now, because of the sealed envelope process and the fact that HUD homes are AS-IS, it can create issues with buyers’ loans. Also, keep in mind that some HUD homes are in need of serious repairs and this should be considered prior to making an offer.

The reasons for purchasing a HUD home are many. Since you’re buying a distressed property, you stand a good chance of being able to buy at under-market value. In addition, the federal government allows for tax benefits. In some situations, they will allow a police officer, firefighter, or teacher to buy a home for 50% off the listing price. Some conditions apply, but it is a very good way to buy a house for half price, no doubt about it. Also, some HUD homes are actually in good shape and can be great deals. Because of limited knowledge of how they work — both on the part of the public and real estate agents — some people are scared to get involved with a HUD. Thus, buyers and agents with knowledge of the system have an opportunity to purchase these homes that in a regular situation would sell for much more. But few people understand how to even find a HUD home, much less purchase one. If you’re looking to buy a home, I would without a doubt at least ask your real estate agent about HUD homes offered for sale in the area to see whether it might an option for you.

This entry was posted on Tuesday, July 22nd, 2008 at 5:09 pm and is filed under Buying. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.