HUD Foreclosure Fortunes: Reality or Myth?

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Foreclosures are largely considered a great opportunity for investors to pick up heavily discounted properties and some significant instant equity.  As such many people seem to be on the hunt for more information about HUD foreclosures.  I hope to shed some light on the topic and answer the following questions:

• what is a HUD foreclosure?
• how do I find a HUD foreclosure?
• what special rules and procedures are involved?
• do they really stack up as a great investment?

Hopefully that will give you enough information to evaluate this as an investment opportunity and know where to begin.

HUD homes are owned by the United States government through the Department of Housing and Urban Development. When a foreclosure is carried out on these homes, the ownership of the home reverts to the government, for use or "disposal" as they see fit.  HUD contracts management companies to handle the preparation and sale of the homes in each state.  Their respective websites which list all the HUD foreclosures are sorted by state on the HUD website here.

The Purchase Process

HUD foreclosures are sold using a blind bidding process, meaning there’s an offer period, during which sealed bids are accepted via a real estate sales professional who is authorized to sell HUD homes (most are).  However, bids will only be considered from investors if none have been received from owner-occupants.  All offers are opened at the end of that initial offer period and the highest bid will generally be accepted.  If the home remains unsold after the initial period, bids are opened when they are received.  The winning bidder will be notified within a day or two and given a settlement date that's usually 30-60 days from the contract date.

HUD does not offer financing directly but some HUD homes qualify for FHA insured loans.  Otherwise you should simply apply for regular financing for a HUD home.

Investment Opportunity?

At first glance there appears to be little or no opportunity here for investors despite there being a lot of buzz about foreclosures representing the chance to obtain heavily discounted houses.  Especially given the fact that you must first wait to give owner-occupants first shot at any and all HUD foreclsoures.  However, there is an opportunity here for investors.

You see, HUD foreclosures are sold "as is" and they often have enough problems that your average home buyer will simply not be interested.  However, the good news is that the priority given to owner-occupants actually becomes a useful screening process for you as an investor.  This is because the properties that most home buyers would be interested in will not have sufficient profit potential for investors.

This means the opportunity in HUD foreclosures lies in the fixer-uppers.  And as such they are really only suitable acquisitions for investors pursuing that particular strategy.  It will not be a good source of deals for an investor who is not an accomplished fixer-upper.

You will need to get good repair estimates and choose the properties wisely.  In other words, you must choose properties with problems that you can handle and where your financial analysis shows sufficient profits can be had after the repairs.  Basically, you will need a good valuation of the ARV (after repair value) and subtract the cost estimates for the repair work.  You then need to subtract any profits and safety margin to come up with your maximum offer for the property.

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