The Secrets of Buying HUD Foreclosures
How Insiders Buy HUD Foreclosures at Thousands Off the Listing Price
It’s possible to buy HUD foreclosures for thousands off the auction starting price. While first-time buyers should usually stick to the traditional process, more experienced bidders and risk-takers can tackle these three HUD foreclosure strategies.
Here’s what your real estate agent probably won’t tell you about buying HUD foreclosures:
Secret #1 – You can make low-ball bids on HUD foreclosures.
If you are the sole bidder on a HUD foreclosure, you will be awarded the property – even if your bid is slightly below the auction starting price. Most HUD offices will automatically accept low-ball bids if they are within a certain percentage of the asking price (usually between 85% and 88%). This strategy usually works best for those bidding as owner-occupants. It is not uncommon for some of the less-popular HUD foreclosures to have no bids in the initial round.
Keep in mind that making low-ball offers on HUD foreclosures is always risky. If anyone else bids on the property, you will probably lose.
Secret #2 – Some realtors offer discounted commissions on HUD foreclosures.
The amount you pay to your realtor is deducted from the final bid price (the price that HUD uses to determine the auction winner). By paying a lower commission to your realtor, you can decrease your bid. (See: What You Need to Know About HUD Approved Realtors).
HUD allows the buyer’s agent to take up to 5% of the bid amount. If you find a discount agent, you can negotiate a smaller commission – especially if you’re an experienced buyer who can do most of the work alone. Some realtors have been known to take as little as 1.5% to place bids on HUD foreclosures.
A reduced commission could save you thousands, but keep in mind that this practice is discouraged by the majority of realtors. Don’t expect most agents to respond pleasantly when asked about taking a commission cut – that’s their pay you’re talking about. The best way to negotiate a low commission is to find an agent who is already advertising discounted work. They’ll be more likely to respond in the affirmative, especially if you don’t require a lot of “hand-holding.”
Secret #3 – The government will pay for repairs on some HUD foreclosures.
Although the government makes a big deal of claiming that HUD foreclosures are sold “as-is,” there are a couple ways to get money for repairs. Some HUD foreclosures come with an escrow account to pay for major fix-ups. The winning bidder may then use the account to get the property up to code.
Buyers may also get financing through HUD’s 203(k) program. Unlike traditional financing, these low-interest loans cover both the cost of the property and the estimated cost of repairs. HUD’s website explains:
“When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203(k) program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.”
Getting a 203(k) loan is an easy way to pay for repairs and is often a good choice for buyers who make a profit by “flipping” HUD foreclosures every few years.
Keep in mind that these tactics aren’t for everyone. Not all bidders want to take risks like putting together low-ball offers or buying a property in need of major repairs. Many bidders need a qualified agent to walk them through the process – even if that means paying a full commission. If you are new to real estate, it may be best to start simple. But, if you know how the system works, these tactics can be extremely useful. By using these three strategies, many experienced buyers have saved tens of thousands on HUD foreclosures.