How to Buy (or Wholesale) HUD Homes
By Vena Jones-Cox

Over the course of the last few months, I’ve had tons of questions about HUD homes—probably sparked by the fact that FHA recently announced that they’ll be selling off 9,000 defaulted loans in the fall.

HUD homes are bank-repossessed properties that were subject to FHA insured mortgages prior to the foreclosure. The usual process is that the bank that owns the mortgage forecloses on the property, determines that it’s worth less than the 82% of value for which FHA insures the loan, makes a claim on the insurance, and turns the property over the HUD, which then sells it.

And there are TONS of HUD foreclosures—FHA loans are the “new subprime”, since they require very low down payments, require much less of the borrower in terms of credit than conventional loans, and are often the loans of choice for first time home buyers in today’s market.

Thanks to relatively lax lending standards, recent statistics show that the 5 year default rate on HUD loans exceeds even that of the old subprime mortgage—26% of the mortgages FHA insured in 2007 are delinquent, 24% of those issued in 2008, 11% in 2009, 4.1% in 2010, and 1% for 2011. Among borrowers in the lowest credit score range allowed by FHA—600 to 640, the delinquency rate is 20%.

So yes, there are a lot of foreclosures owned by HUD—which is to say the American Taxpayer—and the number will continue to climb. But the HUD home sale process is very different than the normal REO sale process. In some ways it’s easier, in some ways harder.

The HUD home bidding process is all done online, at www.HUDHomestore.com. Properties available for sale can be searched by area and by bidder type—most properties have a 15-30 day period wherein they are only available to home owners, so be sure to select the “investor” drop down when searching.

In order to view or bid on a HUD-owned property, you must have an agent who is registered with HUD and has an NAID number. HUD issues special keys to these agents that allow them access to all HUD properties, and an NAID number must be entered in order to present a bid.

Most HUD listings have an entire slew of “attached documents”, which you can view on the site. These include a brief property inspection, which will tell you about some of the mechanical system, and a lead disclosure which will tell you if HUD’s lead paint test came back positive.

The bidding process is very simple: your agent logs in, checks the box that says “investor”, selects the financing type (which will generally be “cash” in the case of investors), enters the gross sales price, requested seller concessions (you can ask HUD to pay some closing costs), requested buyer’s agent commission, buyer name and tax ID number (we’ll come back to that), and submits the bid.

The bid is considered on a “Net to HUD” basis. So if you offer $50,000 on a property, but you ask for $1,000 in seller concessions, your agent asks for a $1,000 commission, and the listing agent has a $1,000 commission, the offer will appear as a $47,000 “Net to HUD” offer.

And it is a bid; once accepted, the agent will be sent an offer package that must be filled out and returned to HUD via snail mail within 48 hours. If the physical offer package is not submitted, the property goes back on the market 2 days later.

Bids are processed the next business day with one of 4 results: either the offer will be cancelled (rejected) or it will be accepted, or countered, or the property will be sold to another bidder.

So the upsides of HUD homes are:

Ease of bidding
Quick response time
Relatively low earnest money requirements ($500 on bids less than $50,000; $1,000 on bids more than $50,000)
More disclosures than most REO properties, including a lead disclosure usually backed by an actual lead test

There are downsides, too:
NO post-offer inspection period. Once you’ve submitted the physical offer with the earnest money check, you CAN NOT get out of the contract based on the results of any inspections. This doesn’t mean you can’t DO inspections, just that your obligation to close can’t be dependant upon the results
On the bright side, your losses are limited to your earnest money. In most bank contracts, the bank leaves open the option of suing you for more than your earnest money.
No assignment of the contract
If HUD’s chosen title company isn’t doing the closing, HUD must see the closing statement 7 days in advance of the closing. This is not disclosed in the contracts, but it is the case—which may cause you to need an extension if your title agent or attorney does what MOST do and sends the closing statement 24 hours in advance of the closing

Tips on Making Offers on HUD Properties:

Do NOT rely on HUDs inspection documents in making a pricing decision. They’re useful: in cases where the wiring has been cut, HUD will often hook a generator to the furnace to see if it works, a step you’d never take. But they are not complete (it’s mechanical systems only), may not be up to date (I’ve seen more than one month-old inspection wherein the plumbing system was reported to be working when it was, by that time, gone), and are sometimes just flat wrong. As always, look at the property before bidding.

If you plan to wholesale the property, use a trustee name as the bidder name, but enter the EIN number of your LLC as the Tax ID number. I’ve gone round and round with HUD about the “Trusts don’t have EIN numbers, and the trustee should NOT be using his social security number because he’s not the buyer” issue to no avail. However, the assignment of land trust method

The old “bid must be within 10% of asking price to be accepted” rule seems to have gone out the window. Prior to the bursting of the real estate bubble, it was useless to make an offer that netted HUD less than 90% of its asking price. Today, HUD is commonly accepting offers as low as 60% of its asking price (which, by the way, is usually relatively reasonable), and I’ve seen offers of as little as 30% accepted. Still, the closer you can make your “net to HUD” offer to the asking price, the greater your chances that it will be accepted—so don’t ask for the moon in that “seller concessions” box.

Always have your agent check the “you may hold offer for backup” box. Generally, when I make an offer on a HUD property, it’s rejected or countered at a price higher than what I want to pay. However, when I check the “hold offer for backup” box on the online form, I receive emails when the price drops, when the property comes back on the market following a contract falling through, and so on. A recent property was priced at $28,000; I offered a net to HUD price of $9,250. Within weeks, the price dropped to $18,000, and then to $13,000, at which point I resubmitted my offer at a net to HUD of $10,450. The property then went off the market—theoretically sold to someone else—but then I got an email this morning saying that it was back on the market at $13,000.

HUD properties are, for the moment, worth pursuing. Just make sure you have a complete understanding of the property and the process before making any offer.