The Step-by-Step Guide to Buying HUD Foreclosure Homes
Every year, hundreds of HUD foreclosure properties are purchased at prices far below market value. If you’re interested in buying property on the cheap and aren’t intimated by homes that need a little elbow-grease, buying HUD foreclosure properties may be an enticing option.
When a home-owner with an FHA-insured loan defaults on his mortgage, the property is acquired by HUD (the U.S. Department of Housing and Urban Development). HUD then sells the house to the general public in order to recoup some of the loss incurred by the foreclosure.
Buying a HUD foreclosure home is surprisingly different than buying a home in the traditional method. HUD uses a unique auction system and has specific requirements for buyers. If you want to buy a HUD foreclosure home, here’s what you need to do:
Step 1 – Find a HUD Approved Realtor
There are two realtors that participate in HUD foreclosure sales: the listing agent and the buyer’s agent. The government has hired real estate agents in each state to list and show HUD foreclosure homes. When you drive by a HUD foreclosure home, you may notice that the yard sign displays an agent’s phone number – this is the listing agent. Novice HUD buyers are sometimes deceived by listing agents who claim that they represent both the buyer (you) and the seller (HUD). You can choose to be represented by the listing agent, but you may also decide to bring in your own agent. Since the listing agent has primary fiduciary duties to the seller (i.e. they are legally obligated to be “on the sellers side”), it’s generally a wise choice to select your own agent.
When choosing an agent, keep in mind that not all realtors are approved to show HUD foreclosure homes. In order to qualify, agents must be certified through their brokerage. Approved realtors are generally given a key or a lockbox code so that they can show any HUD foreclosure home without advance notice. See: What You Need to Know About HUD Approved Realtors.
Step 2 – Search for HUD Foreclosure Homes
Unfortunately, there is not a national database of HUD foreclosure homes. In order to get up-to-date listings, you will need to search through a database run by the firm chosen to list houses in your state. The quality of these websites varies – however, they generally suffice. If your state’s database is not working, you may want to call the listing office to ask about available properties.
To find a link to your state’s HUD foreclosure database, see: Where to Find HUD Homes for Sale.
Step 3 – View and Evaluate HUD Foreclosure Homes
Once you have access to your state’s database of HUD foreclosure homes, you’ll want to evaluate the properties you find. Since HUD foreclosure homes are sold via online auction, you have a limited amount of time to make your decision. Each property will list a starting price and a date that the first bids will be considered.
Each HUD foreclosure listing is also accompanied by a property report in PDF form. You’ll want to read these carefully: the property report contains important information about the condition of the home and the amount of money you’ll need to spend to get it up to code (if any). Prior to putting a property up for auction, HUD does a thorough inspection. The property report will include information on the condition of the roof, the plumbing, the appliances, the carpeting, the heating, and more. The report will also list any damage done to the home.
If you are interested in a HUD foreclosure property you find online, ask your agent to take you for a viewing. HUD foreclosure homes have no occupants, so you will be free to explore the premises. Keep in mind that few HUD foreclosures are turn-key. Some of the properties just need a couple coats of paint. But, many are in need of extensive repair due to owners that were neglectful or spiteful because of the eviction. All HUD homes are sold “as-is.”
Evaluate HUD foreclosure homes carefully – once you make a bid, you cannot retract your offer. See: How to Evaluate HUD Properties.
Step 4 – Qualify to Buy HUD Foreclosures and Gather Required Documents
Buyers are required to meet specific qualifications before submitting a HUD foreclosure bid. Along with your bid, you must submit the following:
- A pre-qualification or pre-approval letter from a lender. You can get a pre-qualification letter by calling a lender, giving some basic over-the-phone information, and receiving a fax or email. A pre-approval letter is more reliable and requires that the lender actually check your credit score and request documentation to prove your income, etc.
- An earnest money deposit. You must give your realtor a certified check or money order for the amount requested by HUD (generally $500-$1000 depending upon the property’s purchase price). If you cannot get financing for the home or back out for any other reason, HUD will keep this money.
Make sure you get these two items ahead of time; you cannot bid for a HUD foreclosure without them. See: How to Qualify for Buying HUD Repos.
Step 5 – Make a Bid
Before the deadline listed on the auction page, submit a HUD foreclosure bid with your agent. If you are an owner-occupant (you will personally live in the home for twelve months or more), you can bid in the initial round. On the date specified, your bid will be compared to any other bids that were submitted. The home will go to the highest bidder (assuming that the bid meets HUD’s minimum price requirements).
If no one bids as an owner-occupant in the first round, the auction will be open to everyone including investors. After about ten days, the bids will be reviewed again. If no bids are accepted, the auction will be open to daily bidding. At the end of each business day, bids will be reviewed for acceptance. At this point HUD may choose to lower the starting price – the highest bidder meeting the minimum price requirement takes the house.
Step 6 – Buy Your HUD Foreclosure Home
Once your bid is accepted, you have 45 days to complete the sale. During this period, you will need to secure financing through a lender. Get started on this right away – unexpected glitches often arise, and HUD is not required to grant a time extension. It is also recommended that you have a private inspection done on the HUD foreclosure home, to make sure there are not any unexpected problems. To close the sale, you will sign papers at an escrow company’s local office.
These six steps cover the basics of purchasing HUD homes. Buying a HUD foreclosure property can be a hassle. But, if you play your cards right, you could sign a purchase agreement at thousands less than the home’s market value.