On this episode of the InvestFourMore Real Estate Podcast, I discuss how to buy distressed houses. The market may be hot in many areas of the country, but there are still great deals out there. If you can learn how to buy REOs (bank foreclosures), short sales, and HUD homes it will give you a competitive advantage. I have been a listing broker for REOs and HUD homes since 2008 so I know a fair bit about how to get good deals with them. There are many different strategies for how to make offers, when to make offers, and when investors can buy these homes.
What are REO properties and how can you buy them?
REO stands for real estate owned and is the term most banks use for their foreclosures. When a borrower gets behind on their payments, the bank can take possession of the home by foreclosing on it. Once the bank completes the foreclosure process the, bank owns the house. Before the bank can take possession most states have a foreclosure sale that is conducted by the sheriff, the trustee, or a court. The general public can buy homes at these sales, but it is very risky. I talk more about buying at foreclosure sales here.
Once the bank takes possession of a foreclosure, they call it a REO. They assign a REO real estate agent to list and sell the property for them. Many investors ask me how to buy REOs before they are listed so that they can get a better deal. Unfortunately, 95 percent of banks will not sell their REOs before they are listed except in giant pools. Some banks and HUD will sell thousands of homes at once to large hedge funds or institutional buyers in pools of properties. If you are not buying hundreds or thousands of properties at once, you have to wait for REOs to be listed in order to buy them.
Once a REO is listed, many of the banks have put in place rules for who can buy them and when. Many banks like Wells Fargo, have owner occupant only periods. That means only people who are going to live in the home can make an offer in that period, which may be the first 10 days of the listing. Once that period is over, investors can bid on the homes. Once investors can bid, I would submit an offer as soon as you can. In some cases the listing agent will let you submit an offer during the owner occupant period and they will submit it as soon as that period is over.
Another misconception I see a lot is that banks just want to get rid of their properties, and will take pennies on the dollar. Banks want to make money just like any of us, and they want to get as much money as they can for their properties. That is one reason they do not sell their homes before they are marketed by an agent. The discount you can get on bank owned REOs varies greatly. When homes are just listed, you may be able to get a 5 or 10 percent discount, but do not expect much more. If a REO property has been on the market for 60 days or longer, you might be able to get much steeper discounts.
How can investors buy short sales?
Short sales are similar to REOs, but they have not gone through foreclosure yet. A short sale happens when the borrower falls behind on payments, but instead of the home going through foreclosure, the bank agrees to let the owner sell the home for less than what they owe the bank. If the bank is owed $100,000, the owner could sell the home for $80,000 and after selling costs, the bank would receive $70,000. Since the bank is agreeing to take less money than they are owed, they have a say in how the home is sold.
The bank cannot force the owner to complete a short sale or even tell them what real estate agent they have to use, but they bank does have a say in the transaction. The bank will have the seller and buyer sign a short sale addendum that states the terms of the sale. Usually the following apply:
- The buyer and seller cannot be related
- The seller may not rent the home back after the sale
- The home must be marketed on the MLS
- The seller cannot receive any kickback from the buyer that is not disclosed
- The contract cannot be assigned before the sale
- Some banks do not let the buyer sell the home for a certain amount of time after they buy it (60 or 90 days)
If the buyer and seller violate any of these terms, it could be considered short sale fraud.
The nice thing about short sales is there is no owner occupant only period and many times you can get an offer submitted right away. Some of my best deals have been on short sales where I was the first person to submit an offer. Once the seller accepts your offer, the bank must approve the price. It can take months to get the short sale approved and there is no guarantee the bank will accept the price.
How to get a great deal on a HUD home?
HUD homes are foreclosures that had FHA loans on them. FHA loans are insured by the government and when the properties go through foreclosure, the properties sometimes end up with HUD. HUD homes are sold on Hudhomestore.com, but a licensed real estate agent must submit the bids. HUD has owner occupant periods and they hold all bids in the beginning of a listing for a certain amount of time before they review them. HUD can have some awesome deals, especially on aged listings.
There are some tricks that investors can use to get a great deal on HUD homes:
- Look for homes that have been actively listed for more than 60 days. Sometimes HUD will take low offers on these homes.
- Submit your bids the first day investors can bid. Once the bidding period is open for investors, HUD looks at bids every day.
- Watch for price changes and submit bids as soon as the price is lowered.
- Always have your real estate agent mark: hold as backup, on your offer. If another offer cancels, HUD may accept your bid.
I still buy most of my deals from the MLS, even though there are not many distressed properties in my market. Even with the low inventory of distressed properties I have bought REOs, and short sales recently. I cannot buy HUD homes because I am prohibited as a HUD listing agent. If you know how the different listings work, have a great real estate agent or are a real estate agent, you can get some awesome deals. I go over many of these strategies and more in my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely. All my books are on sale this week!
[0:00:14.0] MF: Welcome to the Invest Four More Real Estate Podcast. My name is Mark Ferguson, and I am your host. I am a house flipper. I flip 10 to 15 houses a year, I own 13 rental properties with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine, and we sell close to 200 houses a year.
So on this show, we’d like to interview house flippers, landlords, and the best real estate agents in the business. So stay tuned for some great shows. If you want more information on my rentals, on the numbers, how I buy properties, check out InvestFourMore.com.
[00:00:58.8] MF: Hey everyone, it’s Mark Ferguson with Invest Four More. Welcome to another episode of the Invest Four More Real Estate Podcast. I’m happy to have everybody listening. I always appreciate all the support. On this podcast, I’m going to talk about making offers on short sales, foreclosures, REO’s, HUD homes. Kind of go over the basics of what each type of that property is, how they accept offers when you can make offers, and how to get really good deals on them.
So it’s going to be a pretty in depth technical podcast and before we start, just know we have articles on the blog written about all of this. So I’ll make sure that in the show notes there’s links to those articles. If you get confused, if you don’t quite understand what I am talking about, check out those articles, they’ll give you more details. Of course my book, Build a Rental Property Empire, has lots more details on buying properties below market value using all of these strategies. That’s a really good resource and please check that out. Check out the blog if you have more questions, or of course, you can always email me, firstname.lastname@example.org.
All right, so I’m not going to cut to the chase here — or I am going to cut to the chase, get right into it. Talk about each of these ways to buy properties. So an REO, it stands for Real Estate Owned and that is what banks call their foreclosures. A foreclosure is a house where the homeowners bought a house, got a loan, fell behind on their payments, couldn’t make their payments anymore, the bank went through a process to take possession of the home by foreclosing on it. Every state has different foreclosure laws, different foreclosure timelines. Some states, like Colorado, you can foreclose on a house in six months or less,complete the whole process, it’s pretty simple.
Other states like New York or Florida, it can take three years or more to complete a foreclosure on a house. It is crazy. That is why right now you see high numbers of foreclosure still in New York, still in New Jersey, which has high foreclosures as well, and Florida. Because it takes so long to foreclose there. Most of the other states in the country they have shorter foreclosure timeframes have worked through all those foreclosures and their rates are much lower.
But what a bank does is usually there’s a foreclosure sale where the bank has to take possession of the home. So in Colorado we’re a trustee state where the public trustee handles the foreclosures. The bank submits paperwork to them, submits a bid to them, the trustee holds an auction where the bank or an individual can bid on the home. So the bank will have a starting bid of a $100,000. If nobody bids on the house, the bank takes possession, they get the property.
Now, if someone else wants to bid on the house, you can go to the auction — I’ve done this before — bid a $101,000. If you’re the high bidder, you then get the house. Now it seems pretty simple, but sometimes there’s redemptions, which means after you bid on the house and buy it to sale, an owner or a junior lien holder can come through pay you off as a high bidder and they can take possession of the home. A junior lien holder might be a second loan on the property, a judgement against the property, an HOA lien even might be able to. So those junior lien holders can still take possession of the home.
There’s also no guarantee that you are bidding on the first loan. I’ve seen it before where someone bid on the house for $40,000. It was worth $200,000. They’re like “Oh my God, I got an awesome deal.” Well there’s a $150,000 loan on the house that is still on the house because they bought a second loan. What a second loan is when you take out a primary mortgage, $150,000 on a $200,000 house, that loan is usually in first position. It means it gets paid off first when you sell the house. A second loan comes in on a second possession and if you foreclose on that second loan, it does not wipe out the first loan. It’s still there. So you are still responsible for that loan. It is very important that you run title work, have a title company check it out for you to figure out what you are bidding on those foreclosure sales.
You also have to have cash right away. In Colorado. You can bid on a property at 10 AM on Wednesday and if you’re the successful bidder, you have two hours to bring them a cashier’s check for the full amount. There is no loans, unless you can figuring out the bank that can lend you money that fast. They won’t hold it for you. If you’re past that two hours, they will sell it to the next highest bidder or give it back to the bank.
Other states are all different. Some states, you have to bring cashier’s checks with you to the sale to prove that you have the money and pay for it there. Other states like Maryland have a funky where you put a deposit down and then have a closing a couple months later. It’s all different, you really have to know your state laws very well and be a pretty savvy investor to bid at the actual foreclosure sale.
So once you buy a home at the foreclosure sale, again, it’s yours after the redemption period, if there is one. Again, every state is different. Some have redemption periods, some do not and then any liens or costs that were not wiped out during the foreclosure, you are still responsible for. So in Colorado, water liens survive, tax liens survive, HOA liens survive the foreclosure. You still have to pay those even though you bought the house and in a typical sale those would all be paid off. So that’s probably the riskiest most dangerous type of way to buy a property, is at the foreclosure sale.
But once the banks get those properties back from foreclosure, they become REO’s. That’s when they’re an REO; the bank owns the property and they can sell it and do what they want with it. In the past, just about every bank would take the property, list it with a real estate agent and sell it on the market. Things have changed in the last couple of years because of all the regulations from the government. They require short sales to be attempted, modifications for the loan be attempted before the banks can sell these properties.
So what’s very common now is the banks will take these foreclosures and sell them off to another party; bulk. Hundreds, thousands of properties a time. They will sell them off, they don’t have to deal with all the regulations, a third party can deal with it and that company will either keep those rentals, fix them up or just sell them as they are. But for our purposes with this subject, I’m going to stick with banks selling their REO properties.
One of the most common questions I get is, “How do I buy a foreclosure property before it’s listed by an agent?” People want to be able to find the bank, talk to them, buy the house before it’s listed because they figured they can get it for cheaper, there won’t be as much competition. And the truth is 99% of banks will not sell their foreclosures before they list it with an agent. In fact just about all of them have policies in place that prohibit them from selling individual properties without using a real estate agent.
Now they might sell some of those big bulk pools, the hundreds or thousands of properties at a time before they list them but you’re not going to be able to say, “Oh hey, I want to buy this one out of that pool.” Or, “I want to buy two out of pool.” You have to buy the whole thing or nothing and they’re usually the transactions are in the hundreds of millions or billions of dollars when they are selling those giant pools. So most investors will not be able to take part in those transactions.
So if you’re thinking of calling up Bank of America, Country Wide, Wells Fargo, Chase to try and figure out how to find these foreclosures before they’re listed, you’re probably going to end up wasting hours and hours of your time and getting nowhere. It’s going to be very difficult to find someone who will talk to you, and when you do, they’re basically going to say, “Oh we’ll list it with a real estate agent, please look for it on the MLS,” and no matter how hard you try, how many people you talk to that’s basically their policy across the board.
The only banks that may have an exception to that rule are very local banks; local credit unions maybe, banks local to your town or a few towns, they might be willing to sell some of their foreclosures before they’re listed if you have a relationship with them. But the big banks pretty much won’t do it in any scenario. All right, so the banks have these properties once the bank buys the property from the foreclosure sale — they’re not really buying it but they take possession of it — they will sign it to a real estate agent.
So I am an REO and HUD listing broker. That means I’ve listed properties for banks, for HUD for many years. We sold probably close to a thousand REO and HUD properties overall and I am very familiar with the process, I’m very familiar how the banks work. They will sign it to an agent, that agent will put utilities in the agents name, so you are paying utilities on it, maintenance, take care of that and in some cases, the banks will repair the properties as well.
So the banks will have the agent to a BPO, which is called a Broker Price Opinion, that’s where the agent tells the bank what they think the home is worth and the bank will decide if it is worth to fix it, sell it as it is, and go from there. Once the property is fixed up, cleaned up, ready to market, the bank will list it with that agent. The agent will put it in the MLS and they will try and get a great offer on the property.
Now again, most of the banks have policies in place to try and prevent what are called pocket listings, which is when a real estate agent who’s listing the property will sell it to one of his own investors, one of his own buyers to try and get both commissions before anybody else can get to the property. This happened in the past a lot, but now almost all the big banks, most of the smaller banks too will require a property be on the MLS for a certain amount of time before they will even look at offers. It might be five days, seven days, sometimes it’s 14 days a property has to be listed on the MLS before the bank will even look at offers.
So again, it’s tough to get pocket listings to buy properties from agents and sneak in there before other buyers. It’s possible in some cases, but it’s not likely. Most of the time, the banks are going to get some pretty good exposure. They’re going to try and get the best offer they can, make the most money from these properties they can. It used to be people thought that banks were just giving these properties away.
They just want them off their books as fast as possible, would take any price. That is really not the case anymore. The banks want to get as much money as they can. They have shareholders, owners, people who want to make money and if they’re just giving away properties, doesn’t sit in line with what they are trying to do.
All right, another thing to think about is many of these banks — Wells Fargo, Fannie Mae — will have owner occupant periods. Which means the first seven days, first 14 days, only owner occupants can bid on these houses or make an offer on the house. So if you’re an investor, you’re out of luck until that owner occupant period is up. And a lot of people think it’s fair. A lot of people think it sucks, investors can’t do that but I mean it’s the banks house. They own it, they can sell it how they want to. There’s no rules that say they have to sell it to certain people, as long as they’re not discriminating against race or religion all of that. So investors pretty much have to wait.
Now I know there are some people who break the rules, who pretend to be owner occupants, buy as an investor, that is pretty much fraud. You are committing fraud. It’s not just a slap on the hand and you can get in some pretty serious trouble for that. I’ve seen a few people get in trouble with that, not a good situation to be in. Even if you don’t go to jail or get to find a huge amount for doing it, word will get around what you’re doing, it will really hurt your reputation in the area. It will make it much tougher to get deals, which is what us real estate investors are really about. So to me it’s just not worth it even pretend to be an owner occupant or even think about going that route.
All right, so once the property is gone through the owner occupant period. It’s open for investors, all offers pretty much are normally submitted through the listing agent who works with the bank. Sometimes they are submitted online, sometimes the banks will even have auctions at homesearch.com or at auction.com, they’ll auction the property off online. So a lot of people feel listing agents aren’t doing a good job or they are hiding their prices. It’s really not worth it to a listing agent to try and bend the rules to make a few extra bucks here and there.
Most people who do really well in REO do a lot of volume, sell a lot of houses, and they try and keep their clients, the banks extremely happy. If they’re messing around breaking rules, not doing what they’re supposed to do, the banks can find out and they’ll lose all of their business. Now I’m not saying it doesn’t happen. I’ve found and heard stories of some agents who are buying their own properties doing some different things, they are unethical, they got caught. They lost their business, not only with the banks they got caught with, but with every other bank they worked with almost because the banks talk to each other. The asset managers know each other, just about everybody found out what the guy did and he pretty much lost all of his business.
So it’s not worth it for the REO agents to mess around and like I said, it is a conflict of interest for an REO agent to buy their own listing. Usually for their family to buy their own listing as well and we are prohibited from doing that. So most people have a pretty fair chance of buying an REO. It’s just about the price and terms you offer. I’ve bought a number of REO’s in the last few years. Not as much lately because they are simply so few REO properties in Colorado.
But, I still can get those great deals and I play by the rules. I don’t fake being an owner occupant. I don’t have any inside relationships with other agents. I make my offers as strong as they can be and as solid as they can be. Some banks love it when you remove your inspection contingency, when you have cash, no loans, they absolutely love it especially on a property that’s gone under contract and fallen apart multiple times.
So if you can buy houses with cash or use a portfolio loan like I do, which looks like cash but still a loan, you can waive your inspection, it can give you a massive advantage on buying some of these REO properties. Quick closing sometimes helps and what’s cool with REO’s is you can say, “Oh I can close in a week,” and it looks really strong to the seller but the chances are the REO company or the bank is not going to be able to close that fast. It’s probably going to take them at least two weeks to get everything together. So you can do a really quick closing in your offer and then it’ll probably be negotiated out longer, but it still looks really strong to the bank.
Another thing to consider are repairs with these properties. So sometimes they get repaired. Fannie Mae loves to repair properties, it’s always the best work in the world but a lot of times it will do things to get them financeable. Some banks will do no repair at all, it’s all up to the buyer. But the banks do not like to negotiate on inspection items. So that’s something to consider when you’re making an offer. If you’re making an offer and you know the home needs a lot of work, maybe you offer $10,000 more than you really want to pay assuming that you will be able to negotiate with them from inspection items.
The banks are pretty savvy and smart about this. They see it all the time. I see it all the time. Get an offer $110,000, inspection comes back with some items, a new roof, a new furnace, some dry wall repair, or whatever and the buyer says, “Oh this is too much work. I want it for a $100,000.” Well the first thing that the bank is going to do is say, “Okay, you could see the roof when you made the offer. You knew that was bad. So this inspection request is basically worthless because you should have known that when you made the offer.
Maybe you didn’t know the furnace is bad. Okay we’ll think about that one but you knew there were holes in the dry wall. You knew there are concrete slabs and the drive way was cracked. You could see all of those things when you made the offer so we’re just going to pretty much disregard those requests,” and that’s what a bank will do. If you want to send them an inspection request that has 30 different items on it, really small little stuff, most banks I know will look at it and say “rejected”. They won’t even counter, because they don’t want to spend the time going through all of those little items and they will say, “No take it as it or don’t buy it.”
So if you really want to get the bank to negotiate on inspection items or even fix a few things, be very calculated on what you ask for. Ask for things that you might not have been able to see when you made the offer. If the furnace is bad, okay, you might not be able to turn on, maybe they didn’t know that. That’s a valid one, if the wiring is bad, if the plumbing is bad. Maybe if the roof is bad but you couldn’t see it. Like hail damage, you couldn’t really see. But broken windows, you could have seen those. Bad paint, you could see that. Cracked drive way, you can see that.
Don’t ask for things that you should have seen to start with because the bank will just disregard it. It will make them less likely to negotiate on real items that maybe you didn’t see to begin with. So those are some tips on negotiating with the banks. For appraisals, most of the time REO’s are appraising at value because they’re a pretty good deals, not always, but a lot of times you get deals. Sometimes the banks will negotiate on appraisal if it comes in low. That’s something else to consider. If your loan is requiring repairs to be made for the appraisal, the bank is also much more likely to do those repairs than inspection repairs.
So a couple of things to think about on the REO side. REO sellers, banks like to use their own title companies. So if typically the seller will pay for title insurance, half the closing fee, at least in Colorado. The seller on REO’s will do that if you use their title company but if you want to use your own title company, you’ll probably going to have to pay the title fee, the whole closing fee, all the costs because the banks have relationships with their own title companies, they get discount rates. So it’s usually okay to use a bank’s title company. They are usually decent, but you can use your own. It’s just a matter of paying more money for it.
All right, just trying to think — that’s about all I had to say about the REO side of it. There are deals out there. The key is getting your offer submitted right away if you are waiting for an investor period or if the home is just listed and you don’t have to wait, get them submitted right away. Even if the bank is being slow, you still want to get them in right away. When they ask for highest and best, they have multiple offers. Just about every single bank is going to ask for highest and best. That’s their policies as well. They want to give a fair shot to every person who offered to raise their offer to submit their best offer.
So don’t be put out. Don’t be annoyed they’re asking for highest and best, that’s just the way it works. If you want to get a good deal, you have to deal with it. I always tell people, submit the highest offer you can that works for you. I don’t try and guess what other people are offering. I don’t try and get cute with trying to get a really awesome deal when a good deal will still work for me. I always try and offer the most I can that makes sense and go from there. Again, removing inspection, removing appraisal, all of that really helps as well.
All right, so I’m going to move onto short sales now. Again, I have the articles on all of these. I’ll link to if I went too fast or has had information overload right there. A short sale is similar to a foreclosure but not quite the same. So what happens in a short sale is a home owner buys a house, gets a loan on it, make payments, but usually they fall behind on payments. However, the home owner tries to sell it before it goes through the foreclosure. Maybe the homes in the foreclosure process but it hasn’t gone to the foreclosure sale where the bank takes possession.
So a short sale though is not just a home owner selling it. They have to sell it, and the bank is taking less than they are owed. So the home owner has to get permission from the bank to sell it for less than what the bank is owed. If they could sell it without asking the bank for permission, it would just be a regular sale, it wouldn’t matter. But a short sale is when a bank is saying less or shorting the debt that the homeowner owes them. Most banks will want the home owner to be hit behind other payments before they agree to a short sale.
If the home owner is making payments if they are caught up, the bank is like, “Well why should we take less money, you’re making payments, we’re still going to make money by holding this loan. No, we’re not going to give you a relief on your debt.” So usually you have to be behind on your payments to complete the short sale. Not everybody will qualify for short sale. A lot of times the bank will want to see a letter describing why the home owner needs help; maybe they lost the job, got a divorce, a family, sickness or illness. They want to see why you can’t make your payments.
They don’t offer short sales to people just because “our house decrease in value and we don’t really want to make the payments anymore”. They want to see a reason why you financially can’t do it. So it’s not just easy going out there and doing a short sale. You need to show why you are in distress and then you have to prove it with pay stubs, account information, bank account information, job history, tax returns; they want to see every document you have for the last couple of years, financially, to approve the short sale. Now that’s from the seller side.
Now as a buyer, short sales can be very interesting because you aren’t going through the normal REO rules. The home owner is selling the house, not the bank. They decide how they want to sell it, but the bank still has to approve the sale. So that can be a little tricky. The home owner will get a real estate agent, they’ll list the price for sale, trying to get some offers. They get an offer, they submit to the bank, the bank goes through the approval process.
Now the thing is, banks have rules and regulations for being willing to do a short sale. Usually they want the house on the MLS for a certain amount of time. They don’t want the homeowner to be related to anybody buying it; their cousin, their mother, their brother, their kid, they don’t want any related parties doing it. The agent needs to be separate from the transaction. There’s a lot of rules that go on, because the banks do not want the home owner to sell to their brother who then the brother rents it back to the homeowner, they get to stay in the house then the homeowner buys it back from the brother for $50,000 less and the bank was owed.
The bank doesn’t want that. They feel that’s fraud. That’s taking away money from them. In fact short sale fraud was one of the most investigated crimes by the FBI the last few years. I don’t know if it still is, but back when we had so many foreclosures, huge problem in the US with short sale fraud were basically investors, agents were trying to get banks to accept much less than what properties were worth without telling them what it was worth.
Doing fake BPO’s now putting homes on the MLS, not listing them, not marketing them. They weren’t disclosing these items to the bank. They were defrauding the bank of money and a lot of people went to jail for doing that. So be very careful when you are buying short sales. You have to remember, the bank will give you a short sale addendum to sign and if you violate the rules in that short sale addendum, you could be committing fraud, which means you can’t be related in most cases to the buyer and seller, it must be marketed.
It’s not a very good idea to have the listing agent and the buyer’s agent the same person. I think that sends up some red flags, a lot of different things. So when I buy a short sale, I am not buying them from people with their homes on the market. I buy them when other agents list them on the MLS to be completely above the board. So a listing will come on the MLS — the Multiple Listing Service — I’ll see it’s a good deal. I’ll see the house. I will make an offer on it, and that’s how I buy short sales.
I don’t try and find homeowners underwater, distressed, make an offer as a listing agent and the buyer’s agent without listing it. That’s tricky. It’s not always fraud when you do it that way but it could be considered that if you aren’t following everything the bank tells you to do and disclosing everything you do to the bank as well. Some things to consider.
All right, so when I make an offer on the MLS and the short sale, the price could be $150,000. I’m like, “Hey, that’s an awesome deal. This house is worth $250.” So let’s say I make an offer of a 150,000, the homeowner accepts it. That does not mean I’m going to get the house for $150. We have to wait for the bank to accept that $150,000 offer. The bank will go through their process reviewing the seller’s information, the buyer’s information, trying to figure out what the home is worth from BPO’s, from appraisals, and decide if they will accept that $150,000.
It can take two months. It can take six months for that decision to come through. So short sales can take a very long time to get accepted; something to consider. If a home needs any repairs at all and you need those repairs to be done before you buy it, a short sale probably won’t work. Because the homeowner mostly likely has no money and the bank is not going to fix the house that they don’t own yet. So you pretty much have to buy the houses as is when you’re doing a short sale.
Even water, simple issues, getting those fixed, can be very difficult. Now with the banks accepts your offer, says, “Oh yeah, $150,000 we’ll take it,” you move forward like any other closing. In Colorado you can then do an inspection, get an appraisal, all of that, to complete the process. If the bank says, “No, we will not accept a $150,000. That’s too low,” they might counter and say, “Hey, we’ll take a $190,000,” and you as the buyer has the right to say, “Okay, I’ll do that. I will still do $190. It’s a good deal.”
Or you can say, “No, I don’t want it. I am walking away.” At least in Colorado you get your earnest money back. No harm done. If the bank counters you and it’s a not acceptable counter, you can move on from there. In fact, in Colorado, if you make an offer on a short sale, both the seller and the buyer have the right to rescind their offer at any point up until the bank accepts the short sale and everybody can walk away; no harm, no foul.
Short sales are much less supply of them now that foreclosures are down, the market is doing better. But they still are out there, there still are some available. It can be great deals because many times there aren’t owner occupant periods, there aren’t certain amount of time. The house has to be on the market. There aren’t quite as many rules. You have to go through as you do as an REO.
All right and the last one that we’re going to talk about today are HUD homes. So I have learned a lot about HUD homes being a HUD listing broker. Done many trainings, gone to many sessions, many conferences, learned all about HUD. HUD can be very intimidating and very confusing when you’re first trying to buy them. However, once you figured out their system and how the bidding works, it’s actually a very easy process and can be very simple to buy HUD homes and you can get great deals on them as well.
So HUD homes are homes that went through the foreclosure process, just like REO properties do. In fact, they go back to the bank. However, they had the FHA loans on them and FHA loans are insured by the federal government. So not all of them, but some homes that go through foreclosure with an FHA loan go back to the government. The federal government takes possession of them. HUD, which stands for the Housing of Urban Development, takes the houses and sells them to consumers.
In some cases they sell pools as well, but usually they’re selling them to homeowners, owner occupants, investors. HUD has very strict rules on their houses for owner occupants as well. So a HUD home will be listed for most properties that are FHA insured. Again, a lot of details here, they’ll be in the articles, but the house needs less than $5,000 of work, you can usually get an FHA loan on it. HUD has an escrow system for owner occupants. You can escrow some of the repairs, which means pay for them after closing, get them after closing but close on the house before the work is done.
Those properties have a 15 day owner occupant bid period. So that means only owner occupants can bid the first 15 days. An investor has to wait to the 16th day to bid on it. Now there are also other houses that are uninsured. That means they have more than $10,000 of work needed or for some other reason, they won’t qualify for FHA. Those houses has a five day owner occupant period. Investors can bid on the 6th day.
So as an investor it’s very important you know which period that HUD home is in. Because, again, you do not want to bid as an owner occupant when you’re an investor. Pretending to be one is a federal crime because you are doing it on a federally owned home. It is punishable with up to two years in prison and a $250,000 fine and a lot of people think, “Oh they will never find out. They’ll never know I did anything.”
Well HUD might not find out themselves but other investors would love to turn on investors who are cheating. So if someone finds out you are cheating and people do check, there’s a hotline they can call HUD and tell them about it and HUD does do investigations. They do bring charges against people, I’ve seen it before. At a minimum, they will take your earnest money and might ban you from buying HUD homes in the future.
The real estate agent you’re using, if they know about it, they can lose their ability to sell HUD homes at all. Not just that agent, but their entire office will lose their ability to sell HUD homes. It’s a very serious thing, so be careful. But as an investor, once you get pass that owner occupant period, you want to bid that next day for sure, if it’s a house that you’re interested in because HUD will review the bids every single day.
Now if it’s a weekend, they’ll wait until Monday. If it’s a holiday, they’ll wait until the next business day, but you still want to get that bid submitted as soon as you can. If you wait a day or two days, you might miss out on a property when another investor bids on it. You really want to bid fast. One trick you can use too, say a house is uninsured, has a five day bid period — by the way, you can find all HUD homes that are actively listed on hudhomestore.com.
When they are actively for sale, they are on that site. But once they go under contract, they are removed from that site. So you can see all houses that are actively for sale, But again, going back to that, there’s a five day bid period for this house. Midnight on the fifth day, they’ll close the owner occupant bid period, or at least owner occupants only have that bid period ended and they’ll actually open up the investor bid period after midnight.
So if you get up early like four or 5 AM or maybe six to 8 AM, you can submit a bid on that house as an investor on the sixth day. But there’s still a chance an owner occupant bid might be accepted. HUD has not reviewed all those bids yet but you can still get your investor bid in there. HUD will not review that investor bid in owner occupant period, but if they don’t receive any owner occupant bids, they’ll look at that investor bid.
And if they do accept an owner occupant bid — say they accept the bid for a $100,000, they go through the process but the owner occupant cancels because the inspection they found a problem, they will go back and look at that investor bid before they put it back on the market. There’s a chance that you can get your bid accepted as an investor without it going back into the investor period if you bid early on that sixth day. So that’s a little known trick that a lot of people don’t know about.
How much will HUD accept on bids? Well, it depends on the state you’re in and the market you’re in. I know that doesn’t help, but in Colorado we have a very tight market. A very hot real estate market. HUD doesn’t usually accept less than 11% below list price, net to HUD. Net means you have to subtract the real estate commissions and any closing costs you offer. So a listing agent always gets paid 3% with HUD. The buyer’s agent gets paid up to 3%.
So if you are paying the agent a 6% commission, that means HUD will take about 5% less in list price. Not huge discounts. They lower the prices about every 45 days, they lower the prices about 11%. If a home is on the market more than 60 days, then they might start to look at bigger discounts, 20%, 30%. The longer the house is on the market, the more they might accept below list. In other markets, that might be a little tougher, I’ve heard HUD will take 20% less than list price right away. It’s different across the board.
Another thing to consider, if you’re an investor, you will not get your earnest money back when you place a bid on a HUD home. They say you can get half your earnest money back if you cancel due to financing, but that’s up to them. If you cancel for inspection reasons, for any reason at all, they will not give you your earnest money back. They figure investors are savvy, They know what they’re doing.
So be careful when you are bidding as an investor and send in your earnest money. You most likely will not get it back if you cancel your bid. HUD does not pay for title insurance. They do not pay any closing. All of that is a buyer cost. If you want to get the utilities turned on for inspections or appraisals, that is all a buyer cost. You have to pay those costs to get the utilities turned on even before you buy the house. You cannot do any work to the house before you buy it.
If it needs pipe fixed, if it needs something painted before closing, again it’s a federal crime to do any work to it before you buy the property. Please be very careful with that. All bids are submitted on hudhomestore.com by a licensed real estate agent who is approved with HUD. It’s very easy to get approved with HUD, but if you agent is not, they should be able to refer you to someone who is. They can review the bids, they can see the bids online that you make yourself as a buyer.
You cannot see other bids, so it’s not like you can see what the other bids are. You have to make your best bid you can and hope you are the winner. The listing agent does not see the bids. So a lot of people think the listing agent cheats and will have his buyers make higher bids just a little bit higher to get the property. It can’t happen. As a listing agent, I don’t see any of the bids or any of the offers. They are all submitted directly to HUD.
All right, that’s most of the investor stuff for HUD. As an owner occupant, if you’re wondering about that issue, to be an owner occupant you have to live in the home for one year and at least one person on the deed has to live in the house. So you could have three people on the deed, two could live wherever they want as long as one person lives in the house for a year, that counts as an owner occupant. You have to live there more than 50% of the time. So you can’t have two houses and live there 10% and say you’re an owner occupant. You have to be there 50% or more of the time to be considered an owner occupant as well.
All right, there are some other special programs with HUD, a good neighbor next door where firefighters, EMT workers, teachers and police officers can buy a house for 50% of the list price. A very special program; only certain HUD homes are in that program. You can go to hudhomestore.com, click on the “good neighbor map” and it will show you what houses are there. Only owner occupants can buy that. You have to be full-time employed in those fields to be qualified for that program.
You may have also heard of one dollar HUD homes, those again are very special programs. You almost never see those come up and it’s government agencies municipalities that can buy HUD homes for one dollar, not the general public, something else to consider. All right, but HUD can be a great deal. If you learn their bidding system, learn how to find the age listings, how to submit your offers as quickly as possible, you can get some really good deals on HUD’s. As a HUD listing broker, I cannot buy any HUD home listed by anyone. No one in my family can buy any HUD home listed by anyone. No one in my office can buy any HUD home listed by anyone. So they really make it so that we cannot take advantage of the system.
All right, that is all I’ve got. I would say one last thing on making offers, I mentioned the price points for HUD homes, for REO’s the amount of discount they’ll accept varies greatly from bank to bank for the market, but they’re usually take any 50% off right when they’re listed. They’re not taking 20% less right when they are listed. Banks will negotiate some but not a ton until the house is aged or if they find a serious problem. Again, they are not looking to give away properties.
You can get some really good discounts on short sale sometimes if you get your offer in right away and the listing agent submits that before their offers. But sometimes you can run into problems with the bank accepting those. So that’s all I’ve got for this episode. Thank you again for listening. Again, I have a lot more information on the website on this information, articles and then my book, Build a Rental Property Empire, has a ton of information on buying below market value, going into detail on the short sales, the trustee sales, the buying REO’s, buying fair market sales, buying properties from MLS.
All right thank you everyone. Have a great rest of your day.