If you’ve been shopping around for an investment property, chances are you’ve come across listings referred to as HUD homes.
When it comes to real estate investing, there is no such thing as one type of investment property that all investors should aim to buy. Investment properties come in all shapes and sizes, and all of them have the potential to make money – if done right. If you’re thinking of buying HUD homes as a real estate investor, then you probably have a few questions in mind. Below, we answer the 5 most common questions regarding HUD homes to help you determine if this type of investment property is right for you. So, keep reading to see if you should start looking for HUD homes in your area!
What Are HUD Homes?
HUD homes constitute 1-4 unit residential properties that are listed below market value. They seem like a no-brainer for a real estate investor, so what’s the catch? Well, a HUD home is a residential property that was purchased with an FHA loan and has since fallen into foreclosure. Because of the foreclosure, the U.S. Department of Housing and Urban Development (which is what HUD stands for) acquires the real estate property.
As the official owner, HUD then attempts to sell the property to recover the loss on the foreclosure claim. Buying HUD homes is more involved than buying other foreclosed properties. Thus, before you go hunting for a HUD home as a real estate investor, there are a few things you should know regarding finding these real estate properties to financing the purchase.
If you want to learn more about buying foreclosed homes in general, click here.
What’s Different About Buying HUD Homes?
As mentioned, buying a HUD home is different than buying other types of investment properties. First of all, you’re purchasing from a government agency, rather than from a private owner or a bank. Thus, it doesn’t come as a surprise that everything about the purchase is process driven. Furthermore, the sale is managed by asset management companies throughout the country hired by HUD – which often has different policies.
Moreover, when listing a regular home for sale, the seller and his/her real estate agent work to come up with a price based on comparable houses in the area. When putting a HUD home on the market, on the other hand, it goes through an appraisal process to determine its fair market value.
Another difference between buying HUD homes and other investment properties is that they are sold exclusively online in an auction process known as an “offer period.” However, rather than making a traditional offer, real estate investors instead bid on a HUD home during that period. At the end of the offer period, your bid will be opened and compared with other bids that have been received. If yours is the highest bid, it’ll be accepted and your real estate agent is contacted.
After that, your agent will send you a contract, which you’ll have 48 hours to submit to your regional HUD office. This is the only way to lock in the investment property. Otherwise, it could be put back on the market!
Where Can You Find HUD Homes for Sale?
If you’re thinking of buying HUD homes as investment properties, you must be wondering where you can find them. These properties can be found in a number of different ways:
- The HUD Homestore which is the HUD official website. This is the most popular way to find a HUD home which comes with an important benefit for first-time real estate investors. Namely, listings are continuously updated, so at all times the website shows only properties which not been sold yet.
- Hiring a real estate agent or broker to get access to the MLS. It’s good to note that not absolutely all HUD homes are listed on the MLS, but many are.
- Driving for dollars. If you are interested in investing in the local real estate market, you can drive or walk around your neighborhood to check for signs for HUD homes.
When Can Investors Bid for HUD Homes?
Real estate investors should know that HUD has very strict bid periods. When HUD homes get first listed, there is an exclusive listing period at which owner occupants, non-profits or government agencies can submit their bids. If you’re bidding as a real estate investor, you can’t bid during this period! The length of this period varies depending on the property and whether or not it’s insured. If the property is insured, real estate investors can’t bid for the first 15 days, while if it’s uninsured, they can’t bid for the first 5 days.
After this exclusive listing period has expired, real estate investors can submit their bids. If you’re unsure if you can bid as a real estate investor at a certain time, HUD lists who the eligible bidders are on HUD Home Store. When it says “All bidders”, it means real estate investors can submit their bids. A good real estate agent who is familiar with the process of buying HUD homes can walk you through the process as well.
How to Finance HUD Homes?
Not that you know where to find an HUD home, it’s time to consider how to finance the purchase of your investment property of this type. Investors can choose from a few different sources of financing.
One example is loans from the FHA, where both the home and the buyer have to qualify. The most significant advantage of this option is that the down payment is much lower than with conventional mortgage loans and reach 3.5%. However, an FHA loan comes with a few major drawbacks. First of all, such a loan can be used to buy only an insured HUD home with fixes below $5,000. This method is mostly applicable to home buyers rather than real estate investors who will not live in the property.
But if you are a new investor with limited financial resources who cannot afford to pay all cash, you should not despair. You can resort to other financing methods including conventional mortgage loans, private money lenders, hard money loans, or even a Home Equity Line of Credit (HELOC). As each of these options comes with its pros and cons as well as specific requirements, you should study them carefully before deciding how to finance the purchase of HUD homes to rent out.
Tips for Buying HUD Homes
- Find the Right Real Estate Agent: Only real estate agents who are registered with the U.S. Department of Housing and Urban Development may represent home buyers and real estate investors in the purchase of HUD homes online.
- Conduct a Home Inspection & Appraisal: As the new owner of the investment property, you will be responsible for making any needed repairs. Thus, we recommend getting an inspection from a licensed professional home inspector prior to submitting a bid to find out what repairs you’ll need to budget for.
- Evaluate the Investment Property: After finding a HUD home, you’ll need to evaluate it to make sure that it fits in with your investment goals. As a real estate investor, you should perform an investment property analysis to assure its profitability and potential return on investment.
Did you know that Mashvisor provides real estate investors with an investment property calculator? This tool projects estimations of the cash on cash return, cap rate, and rental income expected from investment properties across the U.S housing market. This allows you to easily evaluate your target investment property and compare it to others in the same location to determine whether it’s worth the investment or not.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
HUD homes can be profitable, nontraditional investment properties. However, the process of buying such homes is different and is more time-consuming. As a real estate investor, you need to consider the risks and rewards before deciding that this is the right way for you to buy an investment property and make money from real estate investing. To learn more about how to invest in a HUD home, I recommend reading this: Investing in HUD Homes: The Basics.
Have you ever bought a HUD home or know someone who has? What was the overall experience like? Was it worth the investment, or will you never consider buying a HUD home for investment again? Let us know in the comments!
If you’re looking for your first investment property, sign up with Mashvisor to start analyzing different properties in your city or neighborhood of choice and find the best one!