Recently we bought a HUD foreclosed home. The market price of the 2 unit house was around $43,000, but HUD listed the house to sell at $20,000. We bought the property for only $14,000. This was a great deal. It does not matter where ever you are; HUD homes are almost always a great deal if you want to take the challenge to buy one. I use the word challenge because buying a HUD homes is not straight forward, and the information on the internet is scattered for general people.
Investors frequently buy HUD homes, repairs it, and sell it to the market again. So, they know the procedure very well. But as an owner-occupant buyer, the whole process is not that clear. Moreover, many selling brokers or closing agents also are not well informed about the entire process. This makes HUD homes buying a painful experience for a new owner. It becomes more painful for first time home buyers.
In this article, I’m going to talk about the pros and cons of buying a HUD homes.
Pros and Cons of HUD Homes:
HUD homes are great deals. Below we have described the pros and cons of HUD homes.
Pros of HUD Homes:
Below we have described a few pros of buying a HUD homes.
It’s a Great Deal:
The majority of the time, HUD homes are sold below market price to sell quickly. Though the home priced at below market value, that does not mean those homes are in bad shape.
Here is a tip for you. If you see that the house you are trying to buy has a daily bid submission deadline, don’t bid the full asking price. Instead, bid at 90% of the listing price. If the property condition is not that great and needs a lot of work, bid at 80-85% of the listing price. You have a very high chance of getting the house. If HUD cancels your bid, then offer again by raising your bid price a little bit higher.
Property Condition Report From HUD:
A typical seller always tries to hide the deficiencies of their home. Sometimes people go at great length to hide many defects of the house. For example, seller will paint the house without fixing any cracks, hide plumbing, and structural issues. On the other hand, HUD always provides a property condition report (PCR) and all the disclosure to their best knowledge. That is a good starting point. Though HUD strongly suggests you for inspecting the house with a professional home inspector, yet I’ve seen people buy a HUD house without any inspection.
Good Neighbor Next Door Program:
Teachers, Police Officers, Firefighters, Nurse gets to bid and win a HUD home at almost 50% discount at revitalized areas. The only condition is that the house has to be your primary residence for 36 months.
Listing Broker, Selling Broker, and Closing Agent Cost:
HUD pays all the broker’s fees and reasonable closing costs. This is really helpful. Sometimes, the 3% closing cost HUD gives is more than enough; if it’s not enough, it still reduces your closing cost significantly.
Note: Before even you bid on the house, please have your finances ready. For example, get a pre-approved letter from your lender, or if you are a cash buyer, have your bank statement ready. Upon bid acceptance, you have 48 hours to submit all your preliminary paperwork. If you don’t send your all paperwork — including bank statement or pre-approved letter — within these 48 hours, your bid would be canceled.
Cons of HUD Homes:
Though we have written a lot of points in this section but don’t be afraid. Knowing these things will make you an informed buyer. HUD homes are almost always a good deal. However, there are a few cons to keep in mind.
HUD homes are sold “as-is.” It means if there any deficiency, damage, violations, etc. on the property, HUD will never fix it for you. As a new owner, you have to fix it. Neither HUD will negotiate the home price over the property conditions. It is always recommended that as a new buyer of HUD homes, you must do a walk-through inspection of the homes you intend to buy.
Most of the time, these homes may be sitting on the market for more than one year. A vacant home always deteriorates faster as there is no one to look up to the house.
HUD Homes Inspection Difficulties:
The Asset Manager of the HUD homes provides a property condition report (PCR) and disclosure forms during the HUD listing in HUDhomestore.com. That PCR is reliable, but it is always best to inspect the house with a professional home inspector.
However, inspecting a HUD home could be quite problematic. Every HUD home is winterized. It means the electric supply has been shut off, gas has been shut off, water supply has been shut off, all water in plumbing has been drained, and antifreeze has been poured where necessary. For a complete home inspection, all these utility services need to be turned on. This process is not that easy. First, Through your broker, you have to submit a utility turn on “request form” to Asset Manager with proper fee (sometimes $750). If the Asset Manager approves your request, you have 72 hours to turn all the utility on and do the home inspection. All the bills to turn on services and subsequent charges will be on your name. After the inspection, you must turn off the utilities to stop further charges against your name from the utility company. You also have to pay for the home inspection.
Buyers Select Closing Agent:
HUD’s policy is that the buyers select the closing agent. You may find a list of HUD registered closing agents in your area from the HUD website.
Though you may see a lot of closing agents in your area, don’t automatically assume everyone is fully capable of closing your hud home effortlessly. Always try to find a closing agent who has previously closed a HUD home. Our advice is that before even submitting a bid on a HUD home, visit some of the closing agents in your area. Find a closing agent first, talk to them, and then bid on your HUD home.
During the bidding process, you may ask HUD to pay up to 3% of the closing cost, which may not completely cover your closing costs. You have to pay the remaining balance. The closing cost in New York ranges from $850 to $1500 depending on your lawyer, locality, and difficulty of cases. For our case, HUD only paid $420 for closing. We had to pay around $1100 for closing (Our closing cost was $1500).
Broker to Place a Bid:
You need to find a HUD registered broker to place a bid on HUD homes. You may search the HUD website for a list of HUD brokers.
When we were searching for brokers, we could not find one. It may sound strange to you, but let me explain. We live in Bronx, NY. From the HUD website, we found some of HUD registered broker in our area. We visited almost 6-7 brokers. We found some brokers do not exist anymore (closed their location), some have retired, and one broker even does not know how to bid on a HUD homes. Even one broker asked for $1500 to place a bid on HUD homes. However, we finally managed to get an honest broker.
Remember, to place a bid on HUD homes; you don’t have to pay anything. If any broker wants money, they are outright trying to scam you. The HUD pays the broker after a successful closing. That’s why try to find a broker who at least honest or has won HUD homes before.
Note: When you place a bid check carefully to ensure all the parties such as broker, purchaser (you), closing agent have the correct email address. In our case, our closing agent’s email address in the HUD database was outdated and wrong. As a result, he did not get any emails from HUD, and our bid was almost canceled. Luckily, our broker was proactive and contacted the closing agent and us to rectify this mistake. Having a correct email address is very important. It’s because now HUD sends all the signing documents through DocuSign.
No Key At Closing:
Upon Closing, HUD will not give you any key for your newly purchased house. Every HUD home in an area has the same set of keys. One key can open all the HUD homes. That’s why at closing, HUD will never provide you the keys to the house. You have to change all the locks on your house at your own cost.
Property Location Could Be An Issue:
Though every state has hundreds of HUD homes for sale, that maybe not where you want to move. For example, in New York City, you would rarely find any HUD homes. So, if you are on the market to buy a HUD home, either you have to wait or you have to buy at a location that may not be your preference.
The experience we gathered was great during our first HUD home buying process. If we can gather enough money, we would try to buy another HUD homes as investment purposes. If you get a HUD home in your desired area, please try to buy one. The process is a little bit longer but worth it.
What would make me not eligible to buy a property?
Owner-occupants are not eligible if they purchased a HUD property as owner-occupants in the past two (2) years.
Can I bid on homes myself?
No. HUD requires all bids to be submitted through a HUD-registered broker.
What are the different bid statuses?
AC: Accepted – The Asset Manager has ACCEPTED your bid. Please ensure that all documentation is in order and has been sent to the Asset Manager for review. Failure to do so in a timely manner may result in your bid being canceled.
CA: Canceled – Your bid was canceled by the Asset Manager.
OBC: Other Bid under Contract – Your bid was NOT selected. The Asset Manager entered into a Sales Contract on another bid. If you elected your bid to be a backup, your bid will be saved for future consideration in case the contract gets canceled.
OBS: Other Bid Selected – This bid has NOT been selected. The Asset Manager has a preliminary contract acceptance from a different bidder for this property. If you elected your bid to be a backup, your bid will be saved for future consideration.
PR: Pending Review – Your sealed bid is Pending Review and is not currently available to the Asset Manager. You cannot modify or withdraw this bid. Bids from a previous bid-open date are still under review. The Asset Manager does not have any additional information at this time.
SB: Sealed Bid – Your bid is sealed and is not available to the Asset Manager. You can modify or withdraw the bid unless the Asset Manager has accepted a bid from an earlier bid period.
UR: Under Review – The Asset Manager is currently reviewing your bid and others from this bid-open date.
WI: Withdrawn – You withdrew your bid from consideration before the Asset Manager reviewed the bid.