Investors Flocking to HUD Homes?

The popularity of HUD homes appears to be on the rise these days – and with good reason –everywhere you look, it seems there’s a boarded up house with dead grass and a HUD sign in the front yard. HUD homes originate from foreclosed properties that were purchased with FHA loans. When these homes are foreclosed on, HUD takes possession of the home, puts them back on the market and tries to sell it as quickly as possible to recover their loss. Since these properties are the result of foreclosures and the housing market just came off a record plunge in home prices, followed by record foreclosures, there is a lot of inventory that needs to be sold, and the prices have investors licking their chops awaiting new foreclosed homes to come to market. But can investors even take advantage of these HUD home opportunities? There are opportunities for investors to get involved, but there are also some restrictions.

Investors generally cannot make bids on HUD owned properties during the first 30 days on the market. During this time frame, bidding is only open to owner occupied buyers. The exception to this is homes that do not qualify for FHA financing. In some cases, the property is in such a deteriorated condition or has so many deficiencies that it will be deemed uninsurable, and thus disqualified from Conventional loans and FHA loans, more popularly known as “First Time Home Buyers” loan. The only terms these properties can purchased under is cash. When this is the case, bidding is still restricted to owner occupied buyers, but only for the first five days. After five days, if the property has not gone under contract with an owner occupied buyer, the bidding opens up to anyone interested.

There is a widespread belief that HUD homes can be purchased at a deal, and perhaps to some extent that is true. Don’t forget however, that before they hit the market, they are appraised at the current market value. Once on the market, buyers bid the price up from there, attempting to make the winning bid. So you may be able to get the home for the appraised value, but you can also end up in a bidding war that puts the final sales price well above market value. Lenders will not lend more than the appraised value so buyers with the winning bids that overbid will need to make up the difference with their own money.

So if they are not sold at a discount to market value, and there are restrictions on investors, why all the interest? Because, those properties can be lucrative. Many of these homes were valued at double their asking price in their prime before 2008 when the housing market peaked ahead of its downward spiral. With the market having plunged the way it did – there are many great homes available at prices well below their pre-crash values. Houses that were over priced to begin with were suddenly within reach. But those who didn’t lose their homes have been hanging on to them, unwilling to sell them while the market is so low, thus creating a shortage of inventory. The little inventory that was available was also selling at deep discounts. At some point, houses started becoming undervalued, and the investors, ever vigilant in seeking out profits were paying attention. Those with the means to, could acquire these discounted properties, put a little bit of money into them and resell them to a market that is hungry for turnkey houses. Between lower home prices and record low interest rates, buying property became in vogue again and consumers began meandering about the market, putting pressure on investors already weakened inventory. Even at the end of a bloody bidding war, to the victor goes the spoils, a property still priced well below its previous highs.

When these foreclosed homes hit the markets, inventory starved investors were waiting in the wings to swoop down and snatch up the deals. Restrictions however, keep them at bay during an initial offering period which varies in length depending on whether or not the property is financeable. Once that time period passes, however, its game on for investors…and cash is king. The real interest in HUD homes lies in the availability to pick up an investment at prices most home owners are unwilling to sell at, but because banks are holding onto so much inventory, they need to liquidate them, even if current market prices are deflated from their all time highs.

So HUD homes can be a great opportunity to any one with the financial means to acquire one, whether you buy a fixer upper to flip or a turn-key move in ready rental; as long as you don’t overpay just to win the bid. If you’re an investor, be sure to verify the financing options and how soon non-owner occupied buyers can place bids. You can find out more about HUD homes by going to HudHomeStore.com and while you’re there, get a list of HUD homes in your area. Happy house hunting!