HUD Homes- Pros and Cons

[Daniel Jodrey]

Hello BP World!

I have been with BP for a few weeks and have learned an incredible amount. Knowing very minimally of what I am talking about, I cant help but be drawn to a HUD home as a first investment. Ultimately, I would like to live in my first investment property, so the OO rule does not bother me. Do all HUD homes have a 12 month live in requirement.

My thinking is to find a good HUD home in a good area. Live in this home for a year while fixing it up, and once my requirement ends, sell it for market value and earn a good profit?

Initially, I was thinking of having my first investment be a triplex or fourplex, rent out the other units and live in one. 

I want to know your thoughts and opinions on my strategy, would it work? Would I make a profit once i can sell? Any other hidden requirements that would be a Con? Overall what are Pros and Cons of HUD homes?

Thank you for the help!

[Braden Smith]

Here are a few key points for you related to buying a foreclosure and some of the differences as compared to purchasing a regular listing. It is NOT the same, nor is it as easy as purchasing a traditional listing. 

1. Foreclosures will typically have no property disclosure available as is required by other sellers. Being that the bank or lending institution didn't actually live in the home they are not required to provide a property disclosure by law as all other sellers are.

2. Foreclosures of any kind are always sold as is. The seller (bank, financial or lending institution) will make no repairs of any kind under any circumstances. With a traditional seller, after the home inspection is performed the buyer can ask for items found during the inspection to be addressed and/or repaired. This is not the case with a foreclosure. Typically the buyer cannot ask for any repairs at all. The inspection is simply for the buyers benefit and knowledge. The buyer will typically not get a price reduction in lieu of repairs either.

3. There will typically be no utilities on for inspections and if you would like to have them turned on for inspections, the cost of doing so is the potential buyers responsibility. The seller of a foreclosure usually has all utilities turned off after the house is winterized. The seller is trying to minimize their holding costs while recouping their lending costs. This can be an issue for homes in our market with the heat and humidity we have if they sit empty for long with no air conditioning as significant damage can occur to wood floors and other wood structures due to the humidity.

4. The length of the inspection period is usually shorter. A customary time frame of 10 days for inspections is typical with traditional real estate transactions, but with foreclosures they are are usually shorter, sometimes as little as 3-5 days and this is usually determined by the seller, not the buyer as in most transactions.

5. A deposit or earnest money will be required at time of acceptance of offer by seller. This is true for all home purchases. As soon as the offer is accepted, the clock starts ticking on the inspection period. If during inspections an issue is found that would deter the potential buyer from purchasing the home they may not be able to get their deposit back on a foreclosure if they don't act to cancel the sale within the inspection period.

6. Closing on a foreclosure/REO can take much longer than a traditional real estate purchase/sale. Average closing time for most real estate transactions is about 45 days, whereas a foreclosure can easily take double that amount of time or more. (Short sales are even worse.)

7. The buyer is responsible for the costs of all inspections and with no disclosures, there is no way to tell what you may find during inspections. You could pay for a home inspector, termite inspector, plumbing inspection and roof inspection and then decide you no longer want to purchase the home and you will be out all the money spent on inspections. A typical home inspector costs about $350-400 alone.

8. The same is true for the appraisal. Your lender will require an appraisal for the loan and this cost is the buyers responsibility. This runs about $400-500 and cannot be recouped if you back out on the purchase.

9. Closing costs will typically run about 3-5% of the purchase price and in normal real estate transactions the buyer can legally ask the seller for up to 6% of closings to be paid by seller. Banks don't typically pay for any closing costs though. With a foreclosure you are competing with many other bidders as the competition for these is generally pretty stiff so most other offers will not ask for closings costs to be paid by seller. If multiple offers are presented and your offer asks for closing costs when the others don't your offer will be rejected immediately.

10. Almost all foreclosures require offers to be submitted online which means after the initial exclusive bidding period for owner occupants you are competing with other bidders/buyers from all over the country. The competition is very fierce. especially in our market as we have many, many investors working in our market. Every single foreclosure I have seen sold lately sells for well over list price as competing offers drives the price up.

11. The seller (bank, financial or lending institution) will have a minimum price they are seeking for the sale to recoup their losses, but they will not make that number known and there is no way to determine that figure. They will not sell it for less than that amount and sometimes that amount can be more than the house is worth.

12. The seller (bank, financial or lending institution) is in business to make money. They will not take a loss on a property. The idea that foreclosures are great deals is simply just not true in most cases. A great deal can be found, just as it can on any other property, but foreclosures are not automatically a great deal just because they are foreclosures. They are typically priced lower than other properties because they are damaged. Even if the homeowner that was foreclosed on didn't intentionally damage the property upon leaving, you have to consider that if they didn't have the money to pay their mortgage (which is why they lost the house), then they didn't have money for routine maintenance and repairs either. This means that foreclosures are almost always in bad shape and have not been taken care of very well.

13. As with any offer on a home, the standard state contract is used as required by the Louisiana Real Estate Commission. However, on a foreclosure the bank will many time issue an addendum which basically replaces the state contract and favors the bank. As previously mentioned, the banks are in business to make money and they make sure they are not losing out in these transactions and will do everything they can in their favor.

14. In summary, the way this process works is that the buyer is at the mercy of the bank. The banks will hold the buyer to deadlines and requirements, but they do not adhere to the contract deadlines or requirements on their end. They literally just do whatever they want because they know that if the buyer walks away, there is another buyer already waiting in line to take their place. I have experienced this first hand on numerous occasions as the buyers agent and I see it all the time on the sellers side to as my broker is an REO broker who lists many foreclosures every month.

I have included a few links to articles that will help you to educate yourselves on the process below:

http://blog.equifax.com/real-estate/4-tips-for-buying-a-hud-home/

http://www.realtystore.com/realty-guide/how-to-buy-hud-homes/chapter-2

http://www.realtor.com/home-finance/homebuyer-information/buy-reo-homes-risks.aspx?source=web

http://homebuying.about.com/od/foreclosures/f/Should-We-Buy-A-Bank-Owned-Home-Or-A-Regular-Home.htm