When looking at real estate for sale you might occasionally come across a HUD home.
Which can lead to many questions such as, what are HUD homes, how do HUD homes differ from other homes, why are HUD homes so cheap, and who qualifies for HUD homes?
To begin with per HUD’s website “A HUD home is a 1-to-4 unit residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim“.
What are HUD Homes the Complete Breakdown
While the above definition provides a lot of good information about HUD property. It can still leave a lot of questions unanswered, such as who or what is HUD and how is buying a HUD home different from buying any other home?
HUD or Housing and Urban Development is a branch of the United States Government that insures FHA loans from default provided by commercial banks and lending institutions to the general public.
HUD Homes Definition Breakdown
In order to provide a better explanation of HUD homes, the HUD homes definition is best broken down into 3 separate parts.
HUD Homes Definition Part 1
When the HUD homes definition states “A HUD home is a 1-to-4 unit residential property” it is referring to the type of property loans that HUD insures and by extension the property it can own through the default and foreclosure of those loans.
This is important because not every type of property can be a HUD property. For example, residential property over 4 units such as large apartment buildings, commercial property, and industrial property cannot be a HUD property because HUD does not insure loans made on these properties.
So what are 1-to-4 unit residential properties?
Examples of 1-to-4 unit residential properties include single-family homes, condos, duplexes, and quadplexes.
HUD Homes Definition Part 2
When the definition refers to “acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage” it is explaining how HUD obtained the property.
HUD homes are foreclosures just like any other foreclosure. The only difference with HUD foreclosures is the owner of the property and why the property was acquired through foreclosure.
As a result of the foreclosure, process properties can be owned by many different entities. Some of these entities can include commercial banks, private lenders, and asset management companies.
HUD foreclosures are different though because instead of being owned by a commercial institution they are owned by the United States Government.
But if HUD doesn’t make loans to the public how do they end up owning the property as a foreclosure?
While HUD does not make loans, they do insure loans, specifically FHA loans. So when a commercial bank such as Bank of America makes an FHA loan, HUD insures that loan against default. By doing this if the homeowner defaults on their FHA loan, HUD will pay back Bank of America making them whole again, and will then foreclose on the property to try and recoup their loss.
HUD Homes Definition Part 3
When the HUD homes definition refers to “HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim” it is explaining the process by which HUD attempts to recover the loss from insuring the defaulted FHA loan.
In order for HUD to recover the money lost, they will sell the foreclosed home to the general public through their website which is www.hudhomestore.com.
All HUD homes are sold through this website which is why it’s such a great resource when trying to find a discounted property to buy.
Why are HUD Homes so Cheap?
The great thing about HUD homes is they can often be bought substantially below market value.
The reason why HUD homes can be bought so cheap usually comes down to one of two reasons which include the process by which the home is valued and the condition of the property.
As a buyer of HUD property, it’s important to have a thorough understanding of these reasons to purchase a HUD home with confidence and to understand the pitfalls when buying discounted HUD property.
The List Price of a HUD Home
Before a HUD home is listed for sale, an appraisal is completed on the property in order to determine the list price.
The good news for buyers of HUD property is that sometimes the value on these appraisals comes in substantially lower than the market value for the home.
If a HUD home receives a below-market appraised value this can create an excellent buying opportunity as HUD will then use this lower appraised value when listing the home.
It’s important to understand though when looking at HUD properties and their list prices that the above scenario is not always the case. As many times HUD homes can be appraised at or even above market value leading to high list prices.
So if you are considering purchasing a HUD home you must still do your due diligence in determining what the fair market value of the home is and not just assume the list price of a HUD property is a good deal by default.
HUD Homes and Property Condition
The second and more common reason a HUD property might be sold for cheap is due to its condition. As with any other foreclosure, HUD homes can often have substantial deferred maintenance and property condition issues.
While these deferred maintenance and property condition issues are not necessarily a deal breaker it’s important to thoroughly inspect any HUD home before purchase and to understand that HUD sells their properties in as-is condition.
So if you purchase a HUD home and discover that it has major defects or problems, they are now, unfortunately, your major defects and problems to deal with.
While you can find a lot of great deals on HUD properties due to property condition issues and neglect such as this fixer-upper we purchased from HUD and then successfully flipped.
It’s important before you buy any HUD home to know what your buying and to make sure the property condition issues are not beyond your abilities to fix and repair.
Regardless of the reason why the HUD home is so cheap though when looking for a deal on real estate remember it’s always a numbers game. Meaning that in order to find a good deal on a home you will often have to look at many homes before finding the right one, and this is no different when looking at HUD homes.
While you can find some great deals on HUD properties, not all HUD properties are great deals.
Who Qualifies for HUD Homes?
In order to figure out who qualifies for HUD homes and where to find this information, it’s important to understand how HUD sells their property.
HUD sells all their property by auction through its website at www.hudhomestore.com. If you want to purchase a HUD home you must go through this website to do so.
The first thing to know about buying HUD property through their website is that you cannot submit a bid through their site as an individual, instead, you must use a HUD-approved real estate agent to submit the bid on the property for you on your behalf.
The second thing to know is as mentioned above HUD sells their property in an auction format. Where they have specific bid periods usually lasting around a week but this can vary when HUD will collect bids from all eligible buyers.
After that bid period, has expired HUD will then review all bids received and will either accept a bid, counter a bid, or reject all bids. If no bids were received during the bid period or HUD rejects all received bids, HUD will then initiate a new bid period and the process will continue until HUD sells the property.
Buyer’s that Qualify for a HUD Home
Before bidding on a HUD property though you have to know who qualifies for HUD homes first.
HUD categorizes potential buyers into two main groups with the first group including owner-occupants, non-profits, and government agencies and the second group including everyone else.
If you are an investor and wondering which group you fall into, you fall into the everyone else group.
The important takeaway here is that everyone is qualified to purchase a HUD home but depending on what type of buyer you are, you might not always qualify for every property or bid period.
This is because HUD prefers to sell its properties to owner-occupants, non-profits, and government agencies.
This is why unless the property is in really bad shape the first few bidding periods will only be open to owner-occupants, non-profits, and government agencies.
So if you are an investor and want to purchase a HUD home you will usually be forced to wait on the sidelines for the first few weeks a HUD home is listed before you will be eligible to bid.
How are you supposed to know who is eligible to bid on a particular HUD property though?
The best source for this information is directly on the HUD website. As the website will tell you who is eligible to bid on the property for that particular bid period. It does this by stating whether the property is open only to owner-occupants, non-profits, and government agencies bidders or the property is open to all bidders, which means that investors can bid on the property.
Want to know more about buying HUD homes as an investor? Check out our article “Does Buying HUD Homes to Flip Make Sense?“.
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