Top 7 Tips When Buying a HUD Home

By Eric Bramlett, Broker Agent News

(Note: HUD homes can be a great deal when the market is in a *BUYERS* market. I repeat, a *BUYERS* market. This is when there is so much inventory that buyers can pick and choose amongst the choices. This is typically when foreclosure rates are high, hence more HUD homes all around. However, in a Seller's market, which is what Utah is currently experiencing, there are more buyers than there are homes. This leads to less foreclosures, and ultimately less HUD homes on the market. Then, when one comes up, there is a feeding frenzy. This is because ...

... there exist a whole lot of people who think a HUD Home = instant equity (good deal, etc) but this is not the case in a Seller's market. Many investors will bid up the price of the few HUD homes available (thinking incorrectly that because they are a HUD home that they must be a killer deal) that the eventual winner almost always overpays significantly for the home. And let me say, it is highly likely that it's a home full of problems that nobody is going to fix except you!

My advice is to avoid buying a HUD home AT ALL COSTS in a seller's market unless you know exactly what you are doing.

Now back to your regularly scheduled article. Jen)

When the foreclosure rate is particularly high, as it is in 2007, HUD's inventory swells, and there are deals to be made. HUD deals are very different from traditional purchases, however, so make sure and follow sound advice before purchasing your first HUD home. Follow these tips, and you will be on your way.

1. All HUD Homes Aren't Great Deals

Many buyers mistakenly assume that, if the US Department of HUD is selling, it must be a great deal. This couldn't be further from the truth! Many Realtors relentlessly market HUD homes to drum up business, and this can create a glut of HUD buyers. When the HUD inventory is particularly low, oftentimes buyers will bid the property up to, or above the fair market value. Look at every HUD deal on its own merit, and make your decision based on that. (Really take this advice to heart).

2. Understand the Bidding Process

HUD purchases are very different than conventional deals because they follow a "blind" bidding process. The bidding date is released by HUD, and each buyer submits their best offer-without the knowledge of any other bids. As long as HUD finds the highest offer acceptable, that offer is accepted. HUD retains the right to refuse all offers. (But they don't because newbie investors are so sure they are getting a killer deal that they way overbid the price. HUD wins, you lose.)

3. Know the Difference Between "Owner-Occupant" & "Investor"

One of HUD's goals is to increase the number of US citizens who own homes. Because of this, they give preferential treatment to owner-occupants over investors. Owner-occupants have the first 10 days to bid on any home before it is released to investors. A buyer may bid as an owner-occupant once every two years. Make sure and bid honestly-otherwise it is illegal, and can result in hefty fines. (HUD means business here and keeps a beefy eye towards buyers)

4. Anticipate Repairs

You are allowed the opportunity of a third party inspection before closing, but buyers cannot negotiate repairs based on the results. Backing out of HUD deals & retaining your earnest money is trickier than conventional purchases, too, so you may run the risk of losing your earnest money. Make sure and go through the home thoroughly before bidding on it. (Hello HUD? This is hard to do when you haven't kept the utilities on, yanno).

5. Continuously Monitor the Inventory

As foreclosure rates rise and fall, so does HUD's inventory. The laws of supply & demand definitely apply here-when the inventory is high, your chances of getting a great deal are higher than when they are low. Follow the asking price & sales price of HUD homes-if they are selling far over asking, it might not be the time to buy. (Keep your emotions out of it and make a clear-headed decision).

6. Make Sure Your Realtor & Lender Know the Process

After your bid is accepted, the paperwork begins! In Texas , HUD requires that you submit original signed (in blue ink) paperwork to the HUD agent's office within 48 hours of the bid's acceptance. If the paperwork is incorrect, you are allowed one revision-which must be received within 48 hours. They are just as strict with a lender's closing documents-so make sure both your Realtor & lender are very familiar with the HUD process. Oftentimes, the HUD agent's office will be located in a different city-and often, the escrow agent will be located in yet another city-this can put a very interesting twist on the process, and time constraints. (From a REALTOR's perspective, this is a nightmare. We don't like to do them, but HUD requires that your bid be submitted by a licensed Broker).

7. Act Quickly & Decisively

Because HUD places very strict time constraints on bidding, and due to the bidding process, you must act quickly & decisively. You will typically have 1-2 weeks from the date HUD places the property on the market until the bidding period begins-and more often than not, the property will be purchased on the first day of bidding. Make sure & exercise your due diligence, and make your decision quickly-you often won't get a second chance.

HUD homes can be fantastic opportunities for a buyer or investor to get a great deal on a property. However, because the purchase process is quite different, make sure & do your research before attempting to find your first buy.

Follow these tips, & you will be on your way to a successful transaction!

Disclaimer: The information above is based on Eric's experiences with HUD in Texas from 2004-2007. The process continually changes, so make sure & get the most up-to-date information for your area before bidding. (Disclaimer: The editorial above is based upon several of Jennifer's miserable HUD experiences in Utah 2002 - 2007 :-)

Jennifer CRS GRI
Utah Real Estate Broker