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HUD Foreclosures

Posted by Mike Parsons
July 24, 2006 at 11:12 AM

The Dept. of Housing and Urban Development (HUD), guarantees no/low down payment loans for banks. Meaning if an FHA loan is foreclosed upon, HUD protects the bank by buying the foreclosed property and taking the loss the bank would have incurred.

I like HUD’s better than most foreclosures because you tend to see a better profit margin between the asking price and the potential fixed-up value. I have purchased a few HUD’s over the years for myself and with clients. Sometimes the newer properties don’t need that much work, other times homes need 10’s of thousands of dollars put into them. One of the reasons you can find a better deal with HUD’s is that they give preference for the first 10 days the property is listed, to owner-occupant buyers (buyers that will live in the home for at least 1 year). This allows the savvy buyer to avoid the competition of the investors that buy 90% of all foreclosures.

With that 90% out of the picture it equates to a bigger potential for profit. Investors are allowed to bid on properties that are on the market for 10+ days. My experience has been that just about all of the homes that would make it 10+ days are not homes you would want to buy anyway. Most decent properties are sold within 5 days of being listed. The homes will sit vacant from 1.5-2years. They come in a wide price range of $12k-$220k. This is due to the wonderful bureaucracy of our govt. These homes are not for all buyers. Buyers are expected to bid on homes that do not have the utilities and mechanicals running. Leaky pipes and holes in the walls are also common.

An example of a good HUD buy might be a condo that has the potential to be worth $120,000. HUD has it listed for $92,000 but you bid $93,500 because you know it’s a popular area. When you placed the bid you figured you would need to spend approx. $5000 for paint/carpet/drywall repair/etc…You also budgeted another $1000 for misc. So in the end the buyer has approx. $99,500 invested in a condo that is potentially worth $120,000. That $20,500 is equity that you created by having a vision and seeing it through. This is the basic formula.

I encourage you to do it over and over every two years, each time plugging your profits back into each deal. To get the first one, you will need to have some savings set aside for closing costs and improvements. All buyers are required to be pre-approved before bidding and will need a $1000 deposit. I encourage all clients to live in the homes for at least two years as you would have to pay capital gains tax if you resold the property under a two year period. Overall HUD’s can be a great fit for the handy/savvy buyer that is trying to target a once out of reach neighborhood or wants to build equity fast.