Buying a HUD home

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Real Estate

Foreclosed homes acquired by the U.S. Department of Housing and Urban Development are not as plentiful as they once were, but can still be a great deal.

In the Utah region serviced by the Wasatch Front Multiple Listing service there are 12 such homes with only one in Utah County right now; more specifically, Spanish Fork. Of course, more could be available at any time. HUD acquired these homes through foreclosing if the buyer purchased the home with a loan insured by the Federal Housing Administration. Once the buyer defaults on the loan, the lender files a claim for the balance due. Then FHA pays the claim and transfers ownership of the property to HUD, which sells the home, using designated, local Realtors to handle the listing. These properties could be single-family homes, townhouses and condos, and often are in poor condition.

HUD prices the homes are priced at what it considers fair market value for their location based on appraisal, adjusted by the cost of the repairs the buyer would need to make. They are sold “as is” meaning HUD won’t fix anything.

Typically these are less expensive than regular houses, which translates into more space for less money. The home in Spanish Fork is priced at $65 a square foot for example. Repaired it could be worth as much at $100 a square foot or more.

HUD has a special program for teachers and police officers, who can pick them up for half the market price. The neighborhoods can be pretty sketchy and the buyers are expected to live there. Investors look for HUD homes to fix up and flip for a profit, but must first wait until owner-occupants have a chance to bid on them. If they don’t sell within a specified time period, the bidding is open to investors.

You can find all HUD listings on its Web site at with links to each state’s HUD web site. The websites list the agents who work with HUD homes; only a registered HUD real estate broker and agent can show and sell HUD properties.

Buying a HUD home is different from the usual residential real estate transaction, and unless an agent is well-trained in the process it can be a daunting experience. Of course, the first step for the potential buyer is to get pre-approved with a bank, credit union or other mortgage lender. Then the agent makes an online bid on behalf of the client during an offer period. Unrepresented buyers without an agent aren’t allowed to bid.

Once the offer period ends HUD accepts the highest bid. Unlike conventional sales, no price negotiation takes place between buyer and seller.

Once a bid is accepted and the agent is notified, and is given a settlement date, generally 30 to 60 days from the date of the accepted contract. HUD pays real estate agencies up to 6 percent commission for the sale of the home, providing the agent verifies in the contract that HUD will pay the commission.

The same risks apply for buyers as with conventional purchases: if their financing falls through, they’ll lose the earnest money deposit they made with the bid. If it’s a cash deal the agent will ask for a “proof of funds” letter, usually a letter signed by a banker or other funding source that the money is available.

While some buyers skip the home inspection to save a few hundred dollars my best advise if not to do so on a HUD purchase. A home inspector could find all kinds of issues with these properties including not only needed repairs, but also environmental factors – asbestos, buried storage tanks, lead paint. These factors will help determine a bidding price, especially if repairs are needed. HUD allows just 15 days to complete the inspections. The buyer or the buyer’s agent also is responsible to see that the utilities to be turned on and if there are any charges for that, the buyer must pay. If defects are found, HUD won’t fix anything or pay for any repairs, but it may lower the purchase price. Also HUD may offer insurable homes with a repair escrow.

HUD wants to move these foreclosures and if they are not sold within six months they are sold for $1 each to approved nonprofit organizations and government agencies where they must be used for housing needy families, charitable enterprises or to benefit neighborhoods.

To recap, as a potential HUD homebuyer:

• You must use the services of a HUD registered real estate broker.

• You must be pre-approved for a mortgage or show evidence of adequate cash reserves to purchase the home.

• Owner-occupied bidders receive the first priority to purchase HUD homes.

• HUD offers three types of properties: FHA insurable homes, FHA insurable homes with a repair escrow and homes that are not insurable with an FHA loan.

• Buyers do not have to finance a HUD purchase with an FHA loan.

• HUD homes are sold "as-is."

• Before making a bid on a HUD home, its best to provide your HUD registered real estate broker or agent with the appropriate earnest money in the form of a cashiers check or money order. If the purchase price is $50,00 or less the earnest money if $500, If it’s more than $50,000 the amount is $1,000. The check is made out to real estate brokerage.

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