Real Estate

How To Buy A HUD Home As An Investor

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My sister and I recently bought an investment property together. It’s a HUD foreclosure that we plan to rehab and flip over the next several months. I asked my sis if she would write a series of articles about the experience. She is going to give you all the details down to the penny. Here’s her first installment.

I recently became a real estate investor and will soon be closing on my first HUD home. My plan is to completely rehab the home and then sell it for a profit.

Through the process, I’ve learned a lot about buying a HUD foreclosure. In this article, I’ll share what I’ve learned, along with the details of the home Rob and I are buying.

What Is A HUD Home

Let’s first clarify what exactly a HUD home is and why it’s a good buy. A HUD home is the result of a foreclosure on a 1 to 4-unit residential property that had an FHA-insured mortgage. The FHA pays off the mortgage, and then the home is sold to recoup some or all of the loss.

HUD homes are often good investments for several reasons. They are typically in less than pristine condition (see pictures of our home below). They are of course part of a foreclosure process and have sat vacant for some time, which typically lowers the price of the property. And HUD is motivated to sell the properties to restore the cost paid out to the bank and to avoid further management costs.

Finding A HUD

Finding HUD homes is easy. There is a government-backed website called HUDHomeStore.com. This site enables you to easily search for a HUD home anywhere in the country. You can search by a number of criteria, including city, zip code, street, and even price range. Fortunately, I have a great realtor with over 40 years of experience, and we both check this site regularly in hopes of finding me the best deal.

There are a few things to point out about HUDHomeStore.com. First, the site is updated every Friday. This is important to know because you can promptly check the site once it’s updated and then plan to visit any properties of interest within the next day or two. Remember these properties don’t last long so if you’ve found one you’re interested in you’ve got to be ready to make a move.

Second, pay close attention to the category field called “Buyer Type.” This indicates who is eligible to bid on the home. Here is the complete list you have to choose from:

  • All
  • Owner Occupant
  • Investor
  • Good Neighbor Next Door
  • Government Agency
  • Non-Profit

As an investor, I always choose the ALL category or the INVESTOR category. The ALL category means it’s open to all bidders and the INVESTOR category means investors are able to bid on the home. This allows me to see the properties that are available for my bid.

There’s nothing more frustrating than finding an exceptional house only to learn from your realtor that you aren’t even eligible to bid on the property because it’s reserved for Owner Occupants. To be an owner occupant you have to live in the home for no less than one year after you buy it. Usually, a HUD home is first available to owner occupants. If it doesn’t sell within an allotted time, it becomes available to all bidders. The property I just secured was only available to owner occupants for several months before I had a chance to bid on it.

How To Be Prepared

Even with the little experience I have, there’s one thing I’ve learned – HUD homes go quickly! If you aren’t prepared to make an offer when the home becomes available to investor bids, then you probably aren’t going to get the house. The better prepared you are, the better chance you have of snagging the property. There are a few recommendations I have that will enable you to act quickly once you find the right house. Remember, once a HUD home is opened to ALL bidders you are competing with other investors who have the same goal as you. So, the faster you can get your offer in, the better.

First, have proof of funds readily available. When you make your offer you are going to need proof that shows you have enough money to buy the home. If you’re paying cash, this could include a checking or savings account statement, or a letter from a mortgage lender showing their intent to finance the purchase. HUD does not provide direct financing to buyers, which means buyers must obtain financing through either their own cash reserves or a mortgage lender. Having this proof ahead of time will allow you to get your offer submitted right away.

Second, I would suggest always having all the pertinent information ready to go. This includes the name of the buyer, social security number, address, phone number, etc. Obviously, if you are the only buyer then you are going to know this information. However, if you have a business partner like I did, a simple social security number can sometimes be hard to track down. Losing a great deal over something simple like this could be a big disappointment.

Lastly, be sure you have enough cash for a security deposit. Security deposits are generally between $500 and $1,000. Once your offer is accepted, you are required to submit the deposit. This secures the contract with HUD and your deposit will get credited back to you at closing. It’s not a great deal of money, but you need to be able to quickly access the funds. When it was time for my security deposit I went to the bank and got a cashier’s check within 30 minutes of it being requested and off it was sent.

Our First HUD Investment

At the end of this month, we will close on our first HUD home. It’s a small 3 bedroom, 1 bath home for the purchase price of $46,051.00. We are paying cash for the purchase, which means we don’t have to pay any closing costs associated with a mortgage. However, there will be a few other fees like the cost of title insurance. If all goes as planned, the rehab will take about four weeks to complete. We plan to share all the details of the renovation, including how we determined the cost of the rehab and our projected selling price.

Here’s a look at our investment:


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