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. However, 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.
In this article, I’m going to write everything we learned from our HUD home buying journey so that you know what to expect on your next HUD home buying mission.
Step 1: Find Your Home.
There are thousands of HUD homes throughout the country. Please visit https://www.hudhomestore.com/Home/Index.aspx to find all the HUD homes currently listed for sale. You can search home by states, street address, zip code, and price. There is also a map of the US. You can click on any state or territory to get a full list of all the houses available in that state.
After you click on any state, a list of all the houses available in that state comes up. For example, If I click on NY, this result page https://www.hudhomestore.com/Listing/PropertySearchResult.aspx?sState=NY&sLanguage=ENGLISH comes up. You can narrow down your search by price, bedroom count, and bathroom count.
You can click on the “View Map” button to see all the houses laid out on google maps. If you find any homes in your area, click on the house photo or property case number. This will bring up all the relevant information of the property. Keep this tab open.
On the property page, there is a line named — “Bid Submission Deadline.” Sometimes this deadline is daily at midnight. Don’t freak out. Almost every HUD homes have a midnight bid submission deadline. Take your time and don’t rush to bid on the house.
Now, click on the “Addendums” tab and look for a pdf file named “Disclosures or PCR (Property Condition Report).” Open this pdf file. HUD inspects their FHA foreclosed homes. This is the report they provide. Most of the time, this is quite accurate unless the report is very old. This report lists all the maintenance required for the house, whether this house qualifies for another FHA loan, 203K loan, etc.
Now, open https://www.zillow.com/ and put the address of the above property on this website and click search. Now look for how many days the house is on the market. If this property is on the market for some time, then there are not that many interested buyers for this house. Now, look for the price history. What was the first listed price, and is there any price cut until today? If there are some price cuts, this is a good sign. This information would help us during the bidding process.
Step 2: Find a Broker.
Contact a selling broker in your area who can bid on HUD homes. Getting a broker is crucial because you need one to bid on HUD homes. Ask your broker to show this house. Generally, all the HUD homes in an area have the same key, and any HUD selling broker will be able to give you a tour of the house.
If you don’t know where to start, in the hudhomestore.com website, click on the “Broker Search” button on top of the page. Select your State, City and click on search. You can customize this search by zip code too. From the search result list find a broker, and visit him/her. Ask them whether they can help you bid on a HUD homes. From our experience, many brokers even do not have proper knowledge of HUD homes and how the whole process works. Remember, HUD pays both the listing broker and selling broker’s commission. If any broker asks you for money — except earnest money deposit (EMD) — then run away. Someone listed on the HUD broker list does not necessarily mean they are fully capable of dealing with HUD homes. However, finding a good broker would not be that hassle.
Step 3: Walk Through Inspection.
FHA foreclosed homes stay vacant for a long time. Sometimes up to two years. At this time, the house may deteriorate a lot. Do a full walkthrough inspection of the house. Look for any potential damage to the roof, floor, wall. Find out whether all the kitchen appliances present or not. Go to the basement, if any. Try to find out whether any water damage visible. Do the house needs a lot of painting? Are the sidings okay? If you are not satisfied with this house, just walk away. You will get another beautiful home. Don’t worry. However, if you do like this house, then move to the next step.
Note: HUD Homes Inspection Dilemma.
Whenever HUD takes ownership of a house, they winterize it. They shut off all utilities, removes all water from plumbing, and pours antifreeze where necessary. To do a complete home inspection by a professional home inspector, you need to turn on the utilities. However, HUD’s field service manager (FSM) would not allow you to turn on any utilities if you are not the successful bidder and signed the contract. On the other hand, without knowing the proper condition of electrical wiring, plumbing, HVAC systems, structure, it’s hard to bid on HUD homes. That’s why I call it a HUD Homes Inspection Dilemma.
Step 4: Find a HUD Registered Closing Agent.
You need a HUD registered closing agent to close your HUD homes. You may use the “BSCA Search” tab in the hudhomestore.com website to find a closing agent near you. I highly recommend you visit the closing agent first. Ask him/her whether he/she would be able to close a HUD home for you. Also, make sure about the closing cost. The closing agent would charge you an only onetime fee, which you would pay at the closing. This could range from $850 to $1500, depending on your locality and the closing agent. If anyone quotes you an hourly rate, then walk away.
If your closing agent agrees to close the HUD homes for you, make sure his email address on the HUD website is correct. If not, ask him to update it. HUD will send all the signing documents to that email address. So, it’s crucial to have a valid email address. For example, our closing agent had an outdated email address, which he no longer used. So, he did not receive any email from HUD, and our bid was about to cancel for this.
Step 5: Bid On The House.
Contact your broker to bid on the house. Here is a pro tip. Never offer on the house the full price. For example, if HUD says the list price is $40,000 and from zillow.com price history you saw in the past, HUD tried to sell the house at around $35,000; offer them this $35,000. But if they never lowered the selling price in the past, then offer them 90% of their asking price. In this example, it would be around $37,000. If HUD rejects your offer, increase your bid a little bit. Don’t rush to bid on HUD homes. If you don’t win your desired homes, you could win the next time.
When you bid on the house, make sure all the email addresses from all parties — selling broker, purchaser, closing agent — are correct. HUD will send all the contract documents through DocuSign to sign.
Step 6: Bid Status Result.
Almost always, HUD will notify your broker of the bid result in the next business day. Sometimes, within 48 hours of bid closing date. The broker needs to keep an open eye for an email from HUD. If your bid is accepted, you only have 48 hours to send all the initial paperwork. Otherwise, your bid would be canceled. HUD is very strict with their time frame.
Step 7: Bid Accepted, Submit All Paperwork.
If your bid is accepted, you have 48 hours to complete all the initial paperwork. Submit your copy of id, proof of finance, social security card, and earnest money deposit to your broker. The broker would upload all these documents according to HUD instructions, and send the EMD (Earnest Money Deposit) to the listing broker. If your house purchase price is less than $50,000 then the EMD is $500, else the EMD is $1000.
Step 8: Sign Contract.
If everything went smoothly in Step 7, HUD would initial the contract package signing process through DocuSign. This time, your broker would not sign but only review it. After your brokers’ review, you would get the contract to sign. Read everything in the contract and sign it electronically. After you sign, your closing agent would get the contract to sign. After the closing agent signs the contract, HUD would sign it and return you the ratified contract to your broker. HUD also would contact your closing agent with all the instructions.
After the sales contract ratified by HUD, you have 30 days to close the home if you are a cash buyer.
Note: You have 15 days to inspect the house. We highly recommend you do a home inspection. When you are under contract, you need to submit an application to Field Service Manager (FSM) to activate all the utilities on the house with the required fee. If FSM approves your request, you need to contact the utility companies to activate all the services — water, gas, and electricity. The FSM would give you only 72 hours window to activate all the utilities, inspect your future house, and deactivate the services again. You incur all the fees required to activate and deactivate the utilities. You also have to pay for all the costs incurred in those 72 hours.
Step 9: Close Your Home.
Contact your closing agent for a closing date.
Step 10: Welcome to Your New Home.
After the closing signing ceremony, you are the new owner of the house. HUD does not give any keys at closing. You may ask the listing broker to take out all the locks from the house. You need to change all the locks of the house at your own cost. It’s because all the HUD homes in an area have the same key. That’s why HUD does not give out keys, neither it is safe for you to keep HUD locks on your newly purchased HUD homes.
I hope this article would help to enlighten you on the process of buying a HUD homes. You may also read this article, where we discussed the pros and cons of buying a HUD home.
Frequently Asked Questions.
Here are a few frequently asked questions answered.
What do those IE, IN, and UI financing options mean?
IE = Insurable with Repair Escrow. This property requires repairs estimated to cost no more than $10,000; it is eligible for an FHA-insured loan provided the purchaser’s lender sets up a repair escrow at closing.
IN = Insurable. This property is eligible for an FHA-insured loan in its current condition.
UI = Uninsured. This property requires repairs estimated to cost more than $10,000; it is not eligible for an FHA-insured loan unless a Section 203(k) loan can be arranged.
What is the HUD contract signing process?
Asset Managers initiate the E-Signature process. The signers are then contacted at their email address to sign the contracts in the following order digitally:
Selling Agent/Broker (review only, no signature) > Designated Signer for the Broker > Purchaser(s) > Closing Agent > Asset Manager.