HUD Homes–Saving Big Money with HUD Foreclosures

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If you are in the market to buy your first or next home, a HUD home could potentially save you tens of thousands of dollars on the purchase price.

While buying a HUD Home can save you a lot of money, there are some things to watch out for. In this article we’ll cover the basics of buying a HUD foreclosure home and some tips on getting the lowest price possible.

HUD Homes

HUD Homes are 1 to 4 unit residential properties acquired by HUD as a result of a foreclosure on an FHA-insured mortgage. The condition of HUD foreclosures can vary substantially. I’ve been in some homes that reminded me of the final scenes from The Silence of the Lambs. Some homes, however, were in near move-in condition. Some HUD Homes were built just a few years ago, while others are 50+ years old. Finding the home that’s right for you will take some work, but your willingness to buy a home that needs some repairs and improvements presents an opportunity to buy a home at a big discount.

It’s also important to understand that the availability of HUD housing varies from location to location. In the mid-West, for example, there are many homes to choose from because of the price range (FHA only insures mortgages of a certain dollar amount) and number of foreclosures. In other more expensive areas, you are likely to find far fewer available homes. Fortunately, HUD and its property management contractors offer a convenient way to search for homes online.

HUD Homes Online

On the HUD website you’ll see in the left sidebar a link to HUD Homes. This page provides links to all fifty states and the District of Columbia. Because HUD contracts out the management of its properties, these links will take you to the website run by the property management company for the state you select. For this article, we’ll take a look at Ohio properties, which are managed by National Home Management Solution (NHMS).

Each property management website offers four categories of information you should know about:

1. HUD Home Buyer Information: They provide information on how to buy a HUD Home and on buying your first home. Links to this information typically point back to the HUD website.

2. HUD Home Search: They provide a means to search for homes by city, county and zip code.

While the format of the search results varies from one management company to the next, this screen shot from HUD Homes in Ohio is typical and gives you an idea of the information that is available (click image to enlarge).

From the listing, you can then look at detailed information about each home (click image to enlarge):

From the detail listing you can read an inspection report of the home and details about the home as provided by the management company.

3. HUD Housing Bid Results: Bid results and bid statistics (discussed below) are two critical data points for predicting the minimum bid price HUD will accept for a given home.

It’s critical to recognize that the list price for a HUD Home is almost never the price you’ll pay. For my investments, I’ve bought homes for anywhere between 60% and 87% of the list price. Knowing what HUD’s minimum acceptable bid is takes a lot of trial and error. I probably bid on 15 HUD Homes to get one. But over time, you learn how low you can bid to get a home.

Bid results show you the amount of winning bids. From this you can compare the list price of the home with the winning bid price.

4. Bid Statistics: Unlike bid results, bid statistics shows you all bids on a property (both the winning bid if any, and all losing bids). Coupled with bid results, bid statistics represents extremely valuable information to study when evaluating a HUD Home.

Owner Occupied HUD Homes

As a buyer who will live in the HUD Home, you get several advantages over investors. First, you get to bid on the home first. When HUD housing is first put up for bid, only bidders who will live in the home can bid on it. In the listing of homes, you’ll see the designation “Owner Occupant,” which indicates that the home is open for bids only by those who will occupy the property. After about two weeks, if no acceptable bid is made, investors can bid on the property.

Second, HUD provides a number of incentives for owner occupied buyers. These incentives can change, but typically include assistance with closing costs (currently $2,500), ability to borrow more than the cost of the home to fund needed repairs and improvements, and low down payment financing.

Using a realtor

Only licensed real estate agents can submit a bid for a HUD Home. My strong advice is to find a realtor that has a lot of experience buying HUD Homes. There is definitely an art and science to bidding on these foreclosures, and I’ve seen homeowners bid way too much for a HUD Home due to inexperience. A realtor with experience investing and improving HUD foreclosures would be ideal.

Final Thoughts

I’ve bought five HUD Homes as real estate investments and the fifth one was just this week. It is a 3 bedroom one bath home for which I paid about $40,000. The list price was $65,000. We estimate that improvements will cost $15,000, and we can either rent the property for about $745 per month or sell it for about $85,000. Either way, it should turn out to be a great investment.

Buying a HUD Home for yourself can be equally rewarding. If you’ve bought a HUD Home before, share your experience with us. And if you have any questions, just leave a comment or send me an email.

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