HUD Homes

[jgravittjr]

Are these worth buying to flip? What if they are $30K or more below the Appraisal District price? Does that really mean anything? Any advice would be appreciated.

[Dan Auito]

HUD gives preference to owner occupiers first so if you want to move in for one year, then yes they can be good deals when they truly are below market.

Always offer lower than you think and tell them to keep your offer as a back-up, I've won 3 auctions that way and gotten them all at substantial discounts!

[jgravittjr]

Cool, so if nobody wants to occupy, then I can win it? Great, thanks for the heads up.

[jgravittjr]

1 more question. Do you do all of the work yourself, or can you make money by subbing it all out?

[ThreeRiversREI]

Cool, so if nobody wants to occupy, then I can win it? Great, thanks for the heads up.

Well, you can, the question is if you'd really want to....

Here's the process in a nutshell.

Borrower with an FHA guaranteed loan defaults.
Bank forecloses. (Won't sell short because of the FHA insurance.)
Bank transfers title to HUD & gets reimbursed.
HUD refers the property to their assigned Realtor for that state.
Realtor secures the property, notes condition & reports back to HUD.
HUD sets a selling price based on FMV, As-Is value & what they paid the bank. HUD also determines the amount of the repair escrow (if any) & insurability based on Realtor's report.
Property is first available to teachers, police, etc through the Good Neighbors program.
If no sale, property then becomes available to general Owner Occupants.
If still no sale, property becomes available to investors. NOW you can finally bid.
Bids are ranked by Net $ to HUD, NOT sales price! Ties are broken by giving preference to Good Neighbors over OwnOcc over Investors. Remaining ties are broken by the timestamp bid was received.
If no bids after several weeks, price is reduced & property starts over at #8.
If HUD is notified of additional damage to property, the whole process starts over at #4. (Yes, it's possible for the listed price to go UP because of additional damage!)


Okay, so why does this make it difficult for investors to get a profitable deal on a HUD home?

First off, the property is a foreclosure. So all the problems of homeowners trashing the place on their way out apply. Add to that the delay in the bank getting clear title, transferring it, etc. and property often sit vacant for months AFTER the sheriff has removed the homeowner. Because a single agency is used to handle all the properties in a state (and generally in SEVERAL states), the Realtor doesn't keep much of an eye on the properties allowing even MORE damage to be done.

Properties that manage to make it to sale in relatively good condition are typically snapped up through the Good Neighbor program. Those that aren't can be fought over during the OwnOcc bid process. (I once saw a house that looked like a brand new model home. Was only a year old. Only "defects" were a crease in the carpet in one bedroom from a waterbed & a missing stove. Winning bid exceeded FMV!)

Okay, so -finally- an investor has a crack at it. But -all- investors do. Not only that, but the property will be sold strictly As-Is. Utilities aren't even on to check for water leaks and the like. Any defects in the title will be the Buyer's problem to solve, not HUDs. Also, the property continues to be vacant, abandoned, and generally not even watched after during escrow. If a biker gang moves in after your bid is accepted, again, your problem. Or you can forfeit your earnest money & walk away. (Once found a HUD repo on the market that was a crack house!) Even the best looking deal could turn around and bite an investor in the butt. Likely, perhaps not. But a danger & a cost of doing business.

This is not to say good deals can't be had. When I bought a home to live in back in CA, I bought a HUD property. (The aforementioned crack house, actually. I made mention of that in my offer, along with photos, and bid dirt cheap. HUD quibbled a bit, but basically accepted my offer. Meanwhile I'd reported it to the police & kept an eye on the property myself. Closed on a $115k house for $60k with nothing but the $500 earnest money out of pocket.)

[ThreeRiversREI]

1 more question. Do you do all of the work yourself, or can you make money by subbing it all out?

If you have to do the work yourself to make a deal profitable, you paid too much in the first place.

Look at it another way, how much can you make per hour finding great deals, making offers, and closing on them? How much LESS does a GC charge?