Buying HUD Foreclosures: What Investors Should Know
An increase in HUD foreclosures could lead to profits for investors
Published on: Thursday, December 27, 2007
Written by: Melana Yanos
Who doesn’t love a bargain? For the thrifty capitalist, investing in HUD foreclosures—residential properties owned by the U.S. Department of Housing and Urban Development—appears to be exactly that. Furthermore, the possibility that HUD foreclosure homes might become increasingly available in the coming years should pique renewed interest among investors; however, investors should be aware of limitations in the process of purchasing HUD foreclosures that may or may not fit their personal aims for the investment.
A HUD foreclosure, or HUD home, is a single family or multi-family residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage, according to hud.gov. In the wake of the subprime lending crisis, FHA-insured mortgage loans are becoming more popular among homebuyers who experience difficulty in qualifying for traditional bank loans. An increase in the number of FHA-insured loans distributed to homebuyers is likely to be accompanied by an eventual increase in HUD foreclosures. As a result, investors could stand to reap high profit margins resulting from the affordability and availability of HUD homes on the market.
Most HUD properties are hardly dream homes, however, and are almost never found in high-cost urban areas. FHA-insured mortgages for properties in high-cost areas such as New York and Los Angeles must not exceed a maximum loan limit of $362,790, according the FHA.com—a prohibitively low amount when compared to the actual selling prices of most homes in those areas. Furthermore, all HUD homes are sold as is, and selling prices are discounted based on the extent of repairs and renovations that need to be done.
The process of buying a HUD foreclosure is significantly different than that of purchasing a traditional home. HUD homes are sold through a bidding process that puts investors in line behind intended owner-occupants. During the first 10 days that a HUD home is listed for sale, only owner-occupants are permitted to place bids; if a successful bid is not accepted by the time the initial priority period has elapsed, bidding is opened to investors as well.
HUD homes for sale are posted on Internet listing sites by special HUD-contracted management companies. Bids for HUD homes must be placed through a HUD-registered broker or agent and are usually submitted electronically.
In addition, HUD will pay for some closing and sales commission costs. According to Harrington, Moran and Barksdale, Inc. (HBMI), a company that markets and manages HUD single family homes for several states, HUD will pay up to 5 percent for broker commission costs and up to 3 percent for standard closing items, excluding the closing agent fee. HUD will pay the entire closing agent fee if buyers use HUD closing agents; conversely, buyers who choose to use a non-HUD agent must pay the fees and work with a HUD agent on some legal items.
Although HUD will pay broker commissions and other closing costs, the amount that HUD has to pay is subtracted from the net worth of the bid. Therefore, a bid offer that includes a broker commission of 2 percent would be viewed as more favorable than the same bid amount that includes a 5 percent commission.
Consumers must provide an earnest money deposit to their real estate broker by the time of electronic bidding; deposits can be as low as $500 for properties selling for less than $50,000, according to ForeclosuresToGo.com. Earnest money deposits for winning bids are immediately submitted to the HUD closing agent.
Once a bid is won, the purchaser must close within a time period specified by the closing agent and the correct sales contract must be submitted quickly—within 48 hours for most states. A strict settlement deadline is set, usually 30 to 60 days from the date of the accepted contract.
Investing in HUD foreclosures offers affordability and potential for good returns, but investors, as always, should do their research and exercise patience when dealing with a bidding process that generally caters to owner-occupant buyers. For more information on purchasing HUD homes and internet listing sites, visit hud.gov/homes.
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