How to buy HUD Foreclosures and flip them for profit.
HUD foreclosed properties are available in most areas of the country. The Department of Housing and Urban Development (HUD) is a parent organization to the Federal Housing Administration or (FHA). The sales process is quite a bit different from county/city foreclosures or even purchasing a house from a home owner. This organization provides federal mortgage insurance to lenders, mostly for low to middle income borrowers. Lenders that foreclose on a home previously insured by the FHA, can file a claim for the remaining balance. Once the FHA refunds the lender the ownership will be transferred to HUD. HUD in turn auctions the home on the open market. Contrary to what many believe, investors are given the opportunity to bid on properties that are not purchased by potential owner occupants. Typically after the initial ten day period, investor’s bids are accepted. This is a good thing for house flippers, given that many home owners are not looking for a property that will require major repairs. You can even find multi-unit properties for sale on occasion. Other programs exist for non-profits, teachers, police officers, hurricane Katrina evacuees, firefighters, emergency medical technicians and other public service entities.
Finding HUD owned properties
The cost for a HUD home is based upon several factors and determined by fair market value. Fair Market Value is the combination of the appraisal and adjustments based on condition. If the home is in need of major repairs, HUD may adjust the price and subtract the estimated amount for repairs. They have also been known to start the bidding price at what they paid the lender. Since HUD homes are sold as is, the new owner will be responsible for the repairs. This is right up the alley for us house flippers! The as-is stipulation should not scare you away from placing a contract. In fact, as a flipper, you should seek properties that are listed as-is when searching the Multiple Listing Service (MLS).
HUD contracts with third party management services to list the properties in each state. The auction companies publish listings of properties on its websites. You can find a link for your state here. Once you’ve made your list of properties, contact your local HUD-approved real estate agent for a visit. It is a good idea to do a preliminary inspection of the property prior to placing your bid. You can usually find a list of these agents on HUD’s website. Some brokers advertise that they are HUD approved. The fact is most agents are approved, so just ask around.
The Auction Process
You do not simply submit a contract for a HUD listed property. HUD owned properties are usually auctioned, which means you will need to bid on them. Auctions can be a tricky process for beginners, so I recommend that you thoroughly research the process. However, HUD auctions are not nearly as complicated. Even though you are working through a real estate agent, be sure that they explain the process in detail. Even some agents are barely familiar with the process, so be sure to ask as many questions as you can. The basic process is pretty simple. The first period is called the Offer Period, during which your agent accepts sealed bids from her client/s. At the end of the period, the offers are opened and HUD accepts the best offer which is normally the highest bid. If you are bidding after the initial period is expired, they will open them as they come in. This normally occurs if the property is not sold when they initially open the bidding process. As I stated earlier, Investors will be required to wait at least ten days from the opening period.
Your agent will be notified in a few days if you win the auction and a settlement date will be scheduled. Settlement dates usually are less than 60 days from contract ratification. During this time you will need to do your (DD), no not doo-doo, due diligence silly. Title searches, property inspections, lead inspections, final loan approvals, environmental inspections, land surveys and estimated repair costs are all examples. Keep in mind that HUD does not finance properties, so you will need to have this in place prior to bidding. Digg this… you may even qualify for an FHA insured loan! Talk about a vicious cycle. As with any real estate contract you may loose your good faith deposit if you are unable to close.
At the settlement table your real estate agent will receive her commission, if the contract stipulates, and you should have your property, barring any complications.
