Foreclosure
Investing: Facts about the Process
By The Real Estate Library
The U.S. Department of Housing and Urban Development
(HUD) was established in 1968. It was originally
developed to manage federal housing and community
development programs.
HUD incorporated numerous housing agencies and
assumed administrative responsibility for them.
One of these agencies was the Federal Housing
Administration (FHA). Since 1971 the agency has
been commonly known as HUD/FHA.
How They Get the Property
The old FHA programs and the newer HUD programs
act as an insurance agency for banks, savings
& loans and mortgage bankers who make real
estate loans to buyers and investors. HUD/FHA
does not make the loan, they only insure the lender
against loss in the event of default.
You apply for a real estate loan through an approved
HUD lender, the lender determines whether your
application is accepted, and if so, gives the
money to you. Once the money has been given, the
lender will receive an insurance policy from HUD
that protects its financial interest.
HUD properties are sold to the public when HUD/FHA
mortgages are foreclosed. HUD pays the original
lender the amount of the loan due and other expenses.
HUD then resells the property.
Once the loan is made by the bank, savings &
loan or other authorized lender, that lender does
have the right to foreclose on the property if
the borrower fails to make their monthly payments
on time. When the foreclosure process has been
completed, the lender submits its HUD insurance
policy back to them with foreclosure costs, accumulated
interest and legal fees for reimbursement.
HUD will reimburse the lender. With the lender
paid off and no longer in the picture, HUD , who
now owns the property, can dispose of it in any
manner deemed reasonable.
How They Sell Property
When HUD gets a property back, it turns it over
to its Property Disposition Department which first
secures the property from vandalism or damage.
Next, this department determines if the property
will be sold directly or through an outside broker.
If a broker is used, he must complete the necessary
repairs required by HUD, secure the property,
advertise the property, accept sealed bids, control
the escrow account and make sure the escrow closes.
HUD will pay a 6% sales commission to agents involved
in the sale, whether sold through a broker or
sold by HUD directly.
HUD will allow real estate agents to acquire
HUD properties. An agent bidding on a HUD property,
could effectively reduce his bid price by the
amount of commission he may earn on the sale.
Clearly, this gives the agent an unfair advantage.
In addition, an authorized HUD broker will receive
lists of HUD properties before the general public
does. A broker could prevent the public from having
access to properties. To buy a HUD property, you
must contact a licensed and approved HUD broker
or other agent authorized to sell HUD owned homes.
All offers are submitted through him.
HUD properties are sold '"'as is.'"'
All properties are sold on a cash basis. While
paying in cash is not required, having your financing
arranged without HUD is. HUD will not be required
to arrange or carry financing themselves. You
will need the services of a conventional mortgage
lender.
Condition of Property
HUD homes can be of low to moderate value. Traditionally,
however, HUD homes have been in better shape than
the average VA property.
As discussed earlier, if a real estate agents
can bid on and buy HUD homes at an unfair advantage
to the home buyer and investor, then it stands
to reason that many of the nicer properties are
bought by these agents. The result may be lesser
quality homes left for the general public.
Locating HUD Homes
You can find HUD properties by calling a local
real estate agent or authorized HUD broker, looking
in the newspaper for HUD property sales or by
calling HUD directly. Check you local phone book
for HUD registered real estate agents.
If you contact HUD directly, they may not send
you a list of properties, but they can send you
a list of HUD authorized brokers in your area.
HUD brokers receive new listings of HUD homes
every week. If sold directly, HUD will generally
place ads in newspapers, rather than place individuals
on mailing lists for their single family homes.
The Buying Process
Armed with your list of available properties
narrow your selection by price, neighborhood,
size, whatever. Try to drive by the property if
possible.
HUD restricts the sale of some properties to '"'owner
occupant'"' only. Generally advertised under
the heading, '"'New Listings,'"' HUD
wants the buyers of these properties to actually
reside at that property, for at least one year.
The advertisement will indicate the case number,
address, number of bedrooms and bathrooms, price,
an unrepaired price and repair escrow amount if
available. Due dates for bids are listed. There
will also be a statement indicating whether or
not these properties are eligible for FHA insured
financing.
If you are still interested, contact an authorized
HUD agent. The bid package will state whether
the home can be insured through HUD from a private
lender. If the property can not be insured by
HUD, ask yourself why and do you really want the
property?
Inspect the property. Always do a thorough inspection
inside and out of a property you intend to purchase.
If necessary, hire a professional inspection service.
Compare the asking price to the '"'sold'"'
prices of comparable properties in the area. There
is a good chance the asking price will be around
fair market value.
HUD claims to use current appraisals to establish
each homes value according to age, condition,
size, location, lot size, etc.
If you still want the property, you must submit
a bid package containing a complete set of contracts
to a HUD field office with your deposit of 5%.
The deposit must be in cash, cashiers check, money
order or appropriate letter of credit.
The bid package contains instructions, a sales
contract, a '"'forfeiture of earnest money
deposits'"' document and an addendum regarding
lead-based paints.
The '"'Forfeiture of Earnest Money Deposit'"'
document clearly states that if an individual
buyer submits a contract to purchase a HUD home
and does not perform, the 5% deposit will be retained
by HUD on a non-refundable basis.
The buyer has 30 days to close escrow once the
bid has been accepted. Extensions of this deadline
can be authorized by HUD by prior written approval.
Extensions are normally granted when a private
lender has agreed to finance the property but
needs more time to process the loan application.
The '"'Lead Based Paint Addendum'"'
disclaims any and all responsibility from the
government if illness is caused by owning a HUD
owned property, whether or not it contains lead
based paint. When signed, this document completely
declares HUD immune to any future claims.
HUD defines a one-to-four unit property as either
a single family, duplex, triplex or fourplex.
These are properties that can be sold through
HUD brokers. HUD defines an apartment complex
as a property which has five or more units contained
within it. They can be walk-ups, townhouses rented
as apartments and have either no garages or detached
garages.
Unlike the procedure for single family to fourplex
properties, HUD likes to sell the multi-family
properties directly through their Property Disposition
Department in Washington, D.C.
To be placed on the mailing list, write to:
HUD / FHA
Property Disposition Department
U.S. Dept. of Housing & Urban Development
Washington, D.C. 20410-8000
You may bid more or less than the asking amount
for any HUD home. If you are not the successful
bidder, your earnest money deposit will be refunded
to you. If you are the successful bidder, the
earnest money deposit is credited toward your
down payment. Depending on the asking price, earnest
money deposits generally range from 500 to 1,000
dollars.
Some benefits to buying HUD homes (according
to HUD) are that a real estate broker will prepare
and submit your offer and deposit for you without
charging you. HUD pays up to 5% of the closing
costs, saving you thousands. You can move in faster
if you purchase a HUD home eligible for FHA-insured
mortgage, because it has already been appraised.
HUD homes may be eligible for repair loans built
into the mortgage and buyers may qualify for 3%
down payments.
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