I thought I would try to outline some of the unique aspects of the HUD home buying process.  HUD (which is the Department of Housing and Urban Development) has foreclosed homes all around the United States.

What is a HUD Home?
Many of these houses were originally purchased with an FHA mortgage which is insured by the Federal government via mortgage insurance. When the bank forecloses on the property, the bank files a claim on the insurance for the amount of the mortgage due. HUD pays the bank and then takes ownership of the home.  This is very much like if you totalled your car:  your bank gets the money owed on the car and the insurance company gets the car and you are done.

How much do HUD homes cost?
While HUD homes are supposed to be priced at market values minus any repairs needed, I have found that they are often priced 5-10% below the other REOs on the market. They can be a great value, despite the repairs needed.

Will HUD make the repairs?
HUD homes are sold as-is, but I have seen HUD install new furnaces or repair the plumbing so that these homes can be sold to owner occupants using FHA financing. This work is usually done prior to the home coming on the market. The new owner is responsible for all repairs and improvements that are not done at time of showing.

Where can I find a HUD home?
All HUD properties are listed on the MLS using a Minnesota real estate broker. Other than a mention in the agent remarks, they are not noted any differently. Additionally, all HUD properties around the US can be found at HudHomeStore.com. This is a great place to see as much information about the property as available.

To see a HUD home, you need to work with a HUD-approved real estate agent (like me!) in that area. We can get you access to the home. HUD does NOT work with any buyers directly.

How do I make an offer on a HUD property?
Your HUD-approved real estate agent will submit your offer for you. It is all done electronically on the HUD website. There are initially no documents to sign or fill out. Each home will have different bidding periods such as: first 10-30 days for owner occupants, non-profits, and government agencies only. After that all bidders are accepted.

Bids submitted on-line are all compiled up till midnight of the previous day. At that time, all those are reviewed and countered or accepted before any new offers are reviewed the next day. Thankfully, you should know within 1 business day if you offer is accepted or countered.

If your offer is accepted, your experienced agent will need to insure that they fill out all the documents correctly and submit them within 48 hours of your offer will be rejected. This can be a frustrating process to make sure all signatures are original ink and all documents are filled out correctly and included.

Closing a HUD home
Closing are done by the HUD designated title company. The closing always scheduled exactly 45 days after the acceptance. It doesn’t matter if you are paying cash and could close tomorrow, HUD waits 45 days. Additionally, HUD does not allow any changes to the offer after submission, so no name changes, no buyer adds or removals, and no change of cash vs financed offers.

Will HUD finance the home?
No. You will need to bring in your own financing. As mentioned above, many HUD homes have been repairs so that they can get FHA financing, make sure to confirm this prior to submitting your offer (your agent should help you).

Can I do an inspection?
Yes, but the process is vague. I recommend you do your inspection prior to offer. Investors will forfeit any earnest money and owner occupants will get only 50% of it back for cancelling because of inspection results.

Are there any special programs with HUD homes?
If the homes are not sold within six months, HUD will sell them for $1 each to approved nonprofit organizations and government agencies. The homes must then be used create housing for families in need or to benefit neighborhoods. HUD also offers special home purchase programs for teachers and full time law enforcement officers.

Buying a HUD home for either investment or your personal home can be a great value, but you need to work with a qualified agent to hold your hand through the process. Give me a call and we can discuss!

• What you think the value of the house is does not matter to the bank.  You and I can both believe that this home is worth $40k, but if it is priced at $80k, it is virtually impossible to get the bank to take a 50% discount on the price.  Most often the bank is basing their prices on the advice of their real estate agent and/or other 3rd party agents that they have do BPOs.  And some times, the bank is just plain wrong, but you and I are rarely going to get them off their stubborn number.
• Making a low-ball offer really doesn’t do much for you.  In fact, there may be some validity to the theory that a low ball offer may hurt your future offers on this house.  I have seen the asset managers (humans) get their back arched and almost feel insulted when you send them a low-ball offer.  There is a great chance that they will simply ignore any future offers from you on this AND ANY OTHER HOUSE.  They are under no obligation to sell you anything.  Tread lightly.
• In this market, within the first 5 days, in my experience, you will need to make offers at 98%-100% (or higher) to get a property.  I do see banks simply miss the mark on what they price a home at.  They price a $40k house at $100k.  I am unsure if it is a mistake or some tax/accounting trick for their auditors.  Nevertheless, submitting a 80% of list offer day 1 is a waste of energy.
• Now don’t get me wrong, low ball offers can be made (I have made them) and can get accepted (I have gotten them accepted), but they have to be on homes that have been on the market a while and no one is showing it or making offers recently.  HUD properties are good for this, especially because they tend to keep their list prices abnormally high for too long.  See our upcoming seminar on HUD properties.
• Time is often your best weapon.  If you don’t get the price you want, wait.  My customers have got accepted offers because we simply resubmitted our offer every 30 days until they saw that we were the only game in town.
• Low ball offers on short sales may have more chance simply because if you can justify your offer based on other sales in the area, the listing agent can take that information and send it onto the bank to justify the offer.  Remember, though, you need to base your offer on comps, not just desire.
• Retail sellers are very pinched right now.  Most are selling at huge discounts from just a couple years ago.  I believe many are very stressed out and may just snap if you send them an offer at 80% of list.  While again their property may be high compared to the market, the retail seller may not be able to get down to market (because they have no equity left) or they just haven’t accepted the fact that their house is worth 20-40% less than just a couple years ago.  It will be hard for you to convince them.

Lastly, rely on the experience of your real estate agent to help you through the offer.  If you aren’t getting good guidance from him/her or they don’t work with many foreclosures or short sale, find another agent!

This has happened to my customers more times than I can count.  Many of them think that there is some sort of conspiracy going on.  Maybe the listing agent calls all his customers/friends and tells them about our offer.  Maybe there are a bunch of lurkers out there that find out there is an offer coming in and pounce on it.  Kinda like waiting till the last minute on an eBay auction to put in your bid.

While it may be easier to use these conspiracy theories as an excuse/reason that we are now in multiple offers, I doubt that this the case.  I have seen this happen with dozens of different listing agents on dozens of different houses at all price points.  I can’t believe that all of them are calling their friends when they receive our offer.  Frankly, many REO agents are so busy you never even hear from them, just their assistants.

Here is my alternative theory:  I suspect that we are not alone in our search and that the same event (price change, new property on market, new month, solar flares, eclipse, etc) that triggered us to look at and then write an offer on a property happened to others.  Think about it.  The above property had been on the market 75 days.  Why didn’t we look at it and make an offer at 50 days?  Reason:  It was too high priced.  Why not at 60 days?  Reason:  there were other/better deals out there.

While this will sound a little coarse, I think you could look at it like the home buyer (whether investors or owner occupants) travel much like pack animals.  A heard of zebras all walk in the same direction to the watering hole that is 10 miles away, not really knowing who is leading or which exact direction to walk, but they get there at the same time.

Well, this is just my $0.02.  You can take it or leave it.

When I look at the [other company's] site which I’m sure pulls from MLS I’m seeing the following status on the listings.  It would be interesting to have an explanation of why one is chosen vs another.  Some are obvious but some are murky.

Lender Owned – Obvious

Potential Short Sale – Does this mean the owner “might” be underwater?

Another says “In Foreclosure” Potential Short Sale – Does this  mean the Sheriff sale was done and we’re in redemption?

I thought there were a couple more variations on the “short sale” that I’ve seen and was curious if there was a way to tell if someone has maybe just stopped paying their payment vs they have a sheriff sale scheduled etc.

These are great questions.  As agents, we just assume everyone speaks our language.  I answered John’s question at my MLS site.

Read my thoughts over at my Minnesota Short Sale blog.

Add that to the existing inventory and we have 6.3 million homes for sale, or 23 months worth of inventory.  As a comparison, a normal inventory is 6-7 months worth (we saw 3-5 months in 2002-2005).  With all that inventory coming, experts are predicting that home prices are expected to dip another 8% before they start to clime (unfortunately, they didn’t say when the 8% decline would end).

Read more of the article here.

Writing offers on tenant occupied properties needs a little more attention to ensure that you get what you think you are getting when the closing is over.  If you miss something or simply assume everything will be fine, you may get a rude awakening after closing.

Here is one example:  my client put in an offer on a short sale in February and the seller accepted our offer.  During that process, we got copies of the lease and confirmed the rent amount.  We showed up at the closing today to find out that the landlord had signed a new lease with the tenant in March, dropped her rent by $300 and let her use the damage deposit to cover the March rent when she was out of work.  Now we received a much smaller amount of cash at closing, no damage deposit, and need to have a delicate conversation with the tenant that we’ll be raising the rent $300 (and she needs to pay a new damage deposit). I can see I need to update my boilerplate rental addendum.

Here are some tips on how to craft your purchase agreement when buying investment properties with tenants in them.  Most of these will take the form of an additional addendum on the purchase agreement.

• Write into the purchase agreement that the seller is not allowed to sign any new agreements with the existing tenants without written approval from the buyer. This would have fixed our problem today or at least have given us more notice than 1 hour before closing.
• In the purchase agreement addendum, write in the amount of the security deposit and language that effectively says:  “Seller will provide the buyer the security deposit in the amount of $xxxx at the closing in certified funds, regardless of the disposition of those funds between the tenant and seller, as long as tenant remains in the property”.
• Do not allow the old landlord and his bad rent collection skills to start you off in the hole.  Add language that the rents will be prorated at the time of closing between seller and buyer, again regardless of the collection status of the rents.
• Also, make sure the seller understands that you want to be notified instantly of any tenant issues at the property, such as rent collection, notice to move out, or other problems.  This can be especially important when dealing with short sales that can take months to close after you offer on the property.
• Do not allow the landlord to sign any lease extensions as it is a good idea to let them roll month to month so you can see how the tenant perform with everything prior to signing a new lease.  Worst case, if you don’t like them, give them the 60 days notice and move them out.

Buying an investment property that has tenants in it takes some additional due diligence and purchase agreement language to insure that you get what you think you are getting.

Part of rebuilding New Orleans caused residents often to be challenged with the task of tracing home titles back potentially hundreds of years. With a community rich with history stretching back over two centuries, houses have been passed along through generations of family, sometimes making it quite difficult to establish ownership. Here’s a great letter an attorney wrote to the FHA on behalf of a client:

A New Orleans lawyer sought an FHA loan for a client. He was told the loan would be granted if he could prove satisfactory title to a parcel of property being offered as collateral. The title to the property dated back to 1803, which took the lawyer three months to track down. After sending the information to the FHA, he received the following reply.

(Actual reply from FHA): 
“Upon review of your letter adjoining your client’s loan application, we note that the request is supported by an Abstract of Title. While we compliment the able manner in which you have prepared and presented the application, we must point out that you have only cleared title to the proposed collateral property back to 1803. Before final approval can be accorded, it will be necessary to clear the title back to its origin.” 
Annoyed, the lawyer responded as follows:

(Actual response):
“Your letter regarding title in Case No.189156 has been received. I note that you wish to have title extended further than the 206 years covered by the present application.  I was unaware that any educated person in this country, particularly those working in the property area, would not know that Louisiana was purchased by the United States from France, in 1803 the year of origin identified in our application. For the edification of uninformed FHA bureaucrats, the title to the land prior to U.S. ownership was obtained from France, which had acquired it by Right of Conquest from Spain. The land came into the possession of Spain by Right of Discovery made in the year 1492 by a sea captain named Christopher Columbus, who had been granted the privilege of seeking a new route to India by the Spanish monarch, Queen Isabella. 
The good Queen Isabella, being a pious woman and almost as careful about titles as the FHA, took the precaution of securing the blessing of the Pope before she sold her jewels to finance Columbus’s expedition. Now the Pope, as I’m sure you may know, is the emissary of Jesus Christ, the Son of God, and God, it is commonly accepted, created this world. Therefore, I believe it is safe to presume that God also made that part of the world called Louisiana. God, therefore, would be the owner of origin and His origins date back to before the beginning of time, the world as we know it, and the FHA. I hope you find God’s original claim to be satisfactory. Now, may we have our loan?”

The loan was immediately approved.

So with that all said, it was amazing to be out with a customer of mine the other day looking at condos in Brooklyn Park.  We looked at 4 that were priced at $19,900.  I remember saying to him “I can’t believe I am about to say this, but this condo is too expensive.”  Wow!   I would say even the cheapest new car these days costs more than $19,900.  So why did I say that?  Here is how the numbers break down:

While $90 is not the worst cash flow I have ever seen, if this customer ever has to replace the flooring in the unit, it would require an entire year to pay back the cost of it!   We started talking about offering $15k for the unit and even at that price it is still not enough cash flow to make it worth it.  Now you could pay cash for this unit, but is it really that great a use of your money to get $146 per month for your $20k?

You can’t make every deal work.  Making it cheaper doesn’t always solve the problem.