When a real estate investor asks him/herself “Should I buy a HUD home?”, the answer will always depend on the investor’s goals and what he/she intends to do with the HUD home, as well as the property itself and its condition.
HUD homes can be great investment properties when you plan your investment wisely and carefully. Although HUD homes can be preferable to other types of real estate properties in many cases, there are several factors which need to be taken into consideration before committing your money to investing in them.
So, when asking yourself “Should I buy a HUD home?”, make sure to have a comprehensive understanding of what HUD homes are, and what the advantages and disadvantages of investing in them are before making your decision of whether you should buy a HUD home or not.
What is a HUD home?
A HUD home is basically a foreclosed home. However, the difference between HUD homes and foreclosed homes lies in the ownership of the property after it has been foreclosed.
Foreclosed properties are real estate properties that the bank takes ownership of after the owner of the property fails to pay off the mortgage. In the case of normal foreclosures, the type of mortgage that the owner defaulted on has to be a conventional loan that was acquired from a bank or a private lender.
In the case of HUD homes, however, the defaulted mortgage was obtained from the Federal Housing Administration (FHA loan). So, when the owner of this type of property fails to pay off the mortgage, the ownership of the property goes to the HUD (the Department of Housing and Urban Development).
This is the main difference between a HUD home and a normal foreclosed home. Pretty simple, right?
Related: How to Buy a Foreclosure as an Investment Property
Should I buy a HUD home? – Ask yourself these questions
Now, you’re still wondering – Should I buy a HUD home? To answer this question, there are a few other questions that you should also ask yourself in order to decide whether this is the real estate investment venture that you would like to go for or not.
What investment strategy suits a HUD home?
When you ask yourself “Should I buy a HUD home?”, you should first ask yourself “What kind of investment strategy will I use the property for?”
One of the best investment strategies that real estate investors buy foreclosed homes for in general is a fix-and-flip or a fixer upper investment strategy.
Since HUD homes, similar to foreclosures, are typically in distressed conditions and require a significant amount of repairs and renovation before they are back in a good livable condition, the best investment strategy that you can use for investing in HUD homes is a fixer upper.
HUD homes are typically put up for sale at a much lower price point than the market’s average. This is mainly due to the condition of the property and the amount of renovation needed to get it back into a good habitable condition.
Real estate investors who specialize in HUD home investments will typically look for the greatest opportunities where a home is listed at a drastic discount, and the amount of repairs and renovation it requires is moderate, allowing the investors to fix the property and sell it again at a much higher price for a big chunk of profits.
HUD homes, however, can be used for any type of investment strategy if you know what you’re doing and once you’ve found the balance between the costs of renovating the property and the amount of profit that it can generate using each strategy.
This means that HUD homes can be used as rental properties or buy-and-hold properties as well, although these strategies will require more planning, and it could be more challenging to find a property that is a good fit for them in the HUD homes market, especially when considering the financing options available to you for investing in a HUD home.
Related: Home Renovation: A Guide for Fixer-Upper Investments
How can I finance a HUD home?
When you ask yourself “Should I buy a HUD home?”, you should also ask yourself “What are the financing options that are available to me for purchasing a HUD home?”.
Since HUD homes are typically in distressed conditions and require a lot of repairs, many conventional lenders will refuse to lend you the money to purchase a HUD home.
However, since a fixer upper is the most suitable investment strategy for investing in a HUD home, the best type of loan that you can get for your investment will be a 203(k) Rehabilitation Mortgage Insurance loan. This type of loan, which is obtained through the FHA, will permit the real estate investor to finance up to $35,000 of the repairs and renovation costs.
This means that if you’re a real estate investor and you’re asking yourself “Should I buy a HUD home?” for the purpose of fixing and selling it for profits, the first financing option that should come to mind is the 203(k) Rehabilitation Mortgage Insurance loan. This will allow you to finance the purchase as well as the renovation of the property. Although these loans typically have a higher interest rate on them, a fixer upper strategy typically requires a short period of time to close, meaning that you will be able to pay back the mortgage in a short amount of time after you resell the property.
If you’re considering buying a HUD home for other types of investment strategies, make sure to consult a financial expert or advisor for the best types of loans available to you and that will allow you to renovate the property.
Where can I find a HUD home?
If your answer to the question “Should I buy a HUD home?” is a yes, then you’re probably wondering: “Where can I find a HUD home?”.
There are many online websites and sources that can be used to find and purchase HUD homes. However, it’s generally best to pursue official sources that specialize in HUD home auctions and sales and provide additional info on the property to help you plan your investment.
HUD homes are generally a part of a governmental program, so there exist government-run websites that specifically list available HUD homes and their details for interested buyers. Additionally, the government has made available a number of programs related to HUD homes, offering different options that can help homebuyers and real estate investors and protect their rights to be treated fairly in the housing market and to have access to safe housing conditions.
These programs are:
Should I do a HUD home inspection?
When asking yourself “Should I buy a HUD home?”, the final question that you should ask yourself is related to the inspection of the HUD home.
The shortest answer to HUD home inspections is that you should always… ALWAYS do a home inspection before buying a HUD home. Although HUD homes are typically inspected by the Department of Housing and Urban Development, it is still crucial that you carry out your own inspection of the property to make sure you know all the costs and expenses associated with owning and renovating it.
HUD homes are typically classified by the government as either insured or uninsured. Insured HUD homes are properties that require $5,000 or less in repairs, but not counting for upgrading or remodeling the property. Uninsured HUD homes are properties that require more than $5,000 in repairs. So, it is typically a better idea to look for insured HUD homes, unless you manage to find uninsured HUD homes at a drastic discount to justify the high costs of renovating and repairing the property.
With all of that said, doing your own inspection of the property will guarantee that you will be able to get an accurate assessment of the property’s condition, which will help you plan your investment strategy and pinpoint the costs and expenses that you will incur upon owning the investment property.
Keep in mind, however, that after doing your inspection, if you decide that this investment property is not what you’re looking for, backing out from the deal will also cost you a small amount of money ($500-$1,000). But this amount of money is insignificant when compared to the amount of money that you’d lose if you invest in a HUD home that has very high renovation costs.
Related: What Investors Should Look for During a Home Inspection of a Fixer Upper
Should I buy a HUD home?
If after reading the above, you decide that a HUD home might be a good option for you, then investing in HUD homes might be a good and profitable choice with a high potential for returns. Just make sure that you do your own research and determine the most suitable investment strategy for you, the best financing options, and the optimal property type to invest in HUD homes.
Also, make sure to use Mashvisor during your property search for foreclosed homes to gain some insights and historical data on each property before you invest in it, and to make the best investment decisions based on real estate analytics and data comps, which all can be accessed through Mashvisor.