Did I get taken for a ride on a HUD bid by my broker?

Question

Hi everyone, I'm in the process of making my first HUD auction purchase and I think the listing broker was not upfront with me.

I found a good deal on a property and went to see it, liked it and discussed the bidding process with the listing broker. We decided to put in a bid at $50 dollars over the minimum in order to beat out anyone bidding just at the lowest price.

What I didn't understand at the time is that HUD picks the winning bid on a NET basis after commissions are taken out, and the selling broker put herself down for 3% on both sides of the deal for a total of 6% which reduced my ACTUAL bid by an extra 3%! I could have just offered 3% less and the broker is instead taking that as a commission.

We luckily won the auction anyway but I still feel that I was robbed of 3% of the purchase price, or at the very least she put our deal at risk by knocking 3% (thousands of dollars) off of my bid while letting me feel clever about bidding a piddling $50 more.

Is this common practice? If not; is there a remedy for this? or am I just going to have to chalk this up to another RE learning experience for next time?

I don't begrudge anyone their commissions, but this felt wrong to me.

Greg H. · Answer

There is no before strategy to purchase a HUD.  HUD homes are only available through bidding on HUdhomestore.com with the exception of those that are a reverse mortgage and fall into a different category.  Most HUD homes are listed in the MLS(Often not the correct one) but offers can only be made at HUDhomestore.  After foreclosure, lenders sometimes market the property or use auction.com to attempt to sell but once it is transferred to HUD the process is only done one way

Fannie Mae and Freddie Mac while it many cases offers are made online, the process is no where similar to HUD.  You are correct in that with FNMA waiving your commission is not a strategy

Tyler H. · Answer

True, if you are a broker and buying at auction BEFORE the property gets assigned to an asset manager and listed on the MLS. A good example of using your brokers license as a valuable tool!

I was referring more to the "traditional" government / bank owned sales done through the MLS. HUD, Fannie Mae, Freddie, etc.

I just recently completed a Fannie Mae "Home Path" property and there was no option for a broker to "forfeit" their commission. The process was as I described above.

Greg H. · Answer

Tyler- That is absolutely incorrect.  Since I am a broker and pay cash, I always forfeit my commission which immediately makes my bid 3% better.  For example:

$100,000 Hud Property

Joe Investor bid $100,000 through his agent

$100,000 Bid

-$3000 Listing Broker Commission

-$3000 Selling agent commission

$94000 Net to HUD

My Bid

$97000

-$2910 Listing agent commission

-$0       Selling agent commission

$94090  Net to HUD

My bid wins !

Tyler H. · Answer

I think the point everyone is missing is that HUD contractually agreed to pay a TOTAL of 6% before the property ever hit the market. 3% to each side, the listing and selling agent. So really all the rest doesn't matter, ALL offers already have this taken into account. So basically there is not a correlation between the commission and HUD's net offer.

HUD could have received 10 bids, 1 bid, some over asking price, or under.... But because the 6% came off FIRST, the commissions have no direct impact on how they review offers. The only thing that changes is WHO gets the 6%.

Now, as for future deals, YES you could at least use a Realtor you know to represent you and to distribute that 3% that the listing agent gladly accepted :)

TIP#1 - We know that HUD goes with their best NET offer. So next time your are going to place an offer have your REALTOR add 3% to your offer price, and ask for it back as a seller concession for closing costs. This will save you 3% out of pocket cash. I.E.

You want to offer $200K, add the 3% for a total offer of $206K

Now if you want to kick up your game one more notch then you will add lets say $10 to the offer price so that you out bid the lovely investor next to you who offered $200K cash.

TIP#2 - If by chance your closing costs don't eat up the entire 3%, then tell your LENDER you want to BUY DOWN your rate (assuming your financing). Essentially you will pay more up front to get a lower interest rate. If you don't use the 3%, it will be given back to the seller (HUD), and why would you want to do that?!

I wish everyone much success in 2016! Happy Investing!

Greg Nolan · Answer

Thanks for the response @Greg H. Yes still a great deal but now I'm going to have to get my brokers licence haha.  I am showing up on Monday to flip on the power for the appraiser and dump 10 gallons into the oil tank, asked my dual agent to be there but I guess the kids are on school vacation...so what am I paying her for again :p No effect on the bottom line, just painfully learning the ropes on these HUD deals.

Greg H. · Answer

The answer is depending on the circumstances I would.

The reality is HUD is different from the customary transaction.  I have done 200+ of them and my experience in getting them closed is valuable.  I would caution you against just grabbing a friend to be your buyer's agent.  Even a agent with decades of experience will struggle to get their first few deals closed.  I am assuming that you got a good deal and the few extra dollars will not effect your bottom line ?  Good Luck !

Jeff Valentino · Answer

Thank you.

That agent is going to get the 3% for the listing side. You came to them seeking representation and you got it and HUD plans on paying both sides.

It's also not as easy as just "picking up a commission". HUD deals can be a PIA, especially on the first few as an agent. Nothing fishy at all, but next time I'd have a buyers agent that has done HUD deals.

Wayne Brooks · Answer

Greg, him being your rep now, he does have work to do on your side, and liability. Expecting him to rep you for free is just naive.

Dana Whicker · Answer

@Greg H. I see. Thanks for the clarification.