HUD homes are a great opportunity for investors to get a great deal, but HUD has very different rules for investors than owner occupants. Investors cannot bid right away on HUD homes, and may not get their earnest money back if they cancel an offer. I am a HUD listing Broker, who has listed and sold hundreds of HUD homes over the last three years. I have learned many tricks and techniques that investors can use when purchasing HUD homes. HUD homes can be great deals, but HUD uses a different system to sell their homes than private owners or banks. Even the most seasoned investor with a great Realtor can run into issues when purchasing HUD homes. I hope to help investors avoid common mistakes when purchasing HUD homes with this article. This article focuses on Investors purchasing HUD homes. If you are an owner occupant looking to purchase a HUD home, please see this article The Owner Occupants Guide to Purchasing HUD Homes. HUD has many different rules and procedures for owner occupants.
Check out the video below to see how to look up and bid on HUD homes
How does the bidding system work?
HUD uses asset management companies to sell and manage their homes and property preservation companies to maintain their homes. The asset management companies hire real estate agents to list and market HUD homes. The asset management companies also handle bidding and give work orders to the property preservation companies for maintenance on HUD homes. The property preservation companies or FSMs are in charge of winterizations, lawn maintenance, cleaning and emergency repairs on HUD homes. Each region in the country has different asset management and preservation companies. Each company has different policies regarding the sales and marketing of HUD homes. If you buy a HUD home from one asset management company, you may not encounter the same procedures if you buy from another asset management company.
Where can you find HUD homes?
The most important thing to know about HUD homes is HUDHOMESTORE.COM. HUD lists every house they have for sale on this website and anyone can view it. To search for HUD homes, simply enter the state you are looking in and any other criteria you want to narrow it down with; city, zip code, address etc. Once HUD accepts a bid they remove the property from Hudhomestore.com. If you see a sign in the yard or property in MLS but can’t find it on Hudhomestore.com they may have already accepted a bid. There are a few other reasons the property may not be on the site including price changes or new appraisals.
When can investors bid?
HUD has very strict bid periods on who can bid and when. When HUD homes are first listed there is a bid period for owner occupants, non-profits or government agencies. Investors cannot bid during this bid period, and the length of the bid period varies depending on the home. HUD homes have an appraisal done before they are listed and homes that will go FHA are listed as insured and the properties that won’t go FHA are listed as uninsured. If a property is insured, investors cannot bid for the first 15 days! If a property is uninsured, investors cannot bid for the first 5 days. When you are looking at a listing on Hudhomestore.com look for the period deadline, it will give the last day owner occupants, non-profits and government agencies can bid. Investors can place a bid the next day after the period deadline expires. If a property is still on Hudhomestore.com the day after the period deadline expired, it does not mean HUD did not receive an acceptable bid. HUD reviews bids the first business day after the period deadline, and the property could be on the website for a short time in the morning while they review bids.
This can be very confusing the first time you try to process the information, but it gets easier the more you use Hudhomestore.com. The thing to remember is investors can bid on the first day after the period deadline. If you are unsure who can bid, HUD will list who the eligible bidders are on Hudhomestore.com. When investors can bid it will say “All bidders.”A good real estate agent who knows the HUD system can walk you through the process as well.
I wrote a much more detailed article on exactly how investors should bid on HUD homes here.
Here is a breakdown of the bidding timeline.
For insured homes:
- 15-day owner occupant, government agencies, and non-profit only bid period. The first ten days of this bid period HUD collects all the bids and subsequently review them on the next business day. Thereafter for the next five days, HUD reviews any bids received the following day. (not sure if they review them the same day or the day after the bid is received during this time)
- Investors can bid on the 16th day the home has been actively for sale. You can see this date by looking at the period deadline. Investors can bid on the next day after this deadline.
- If the price is lowered, the owner-occupant period does not start over. Investors can bid right away.
For uninsured homes:
- 7-day lottery bid period. Government agencies and non-profits only can bid. The home is listed on HUDhomestore, but not on the MLS.
- 5-day owner occupant, government agency and non-profit only bid period. HUD accepts bids the first five days and opens them the next business day. Investors can bid on the 6th day.
- If the price is lowered, the owner-occupant period does not start over. Investors can bid right away.
Are all properties on HUDHOMESTORE.COM on the MLS?
HUD will list some properties differently depending on the repairs needed and potential buyers qualifications. On uninsured properties, HUD will list them on Hudhomestore for 7 days, but the only eligible bidders are non-profits and government agencies. During this 7 day period called the lottery period, some asset management companies will list the home in MLS and others will not. Another program HUD uses is the Good Neighbor Next Door Program(GNND). They sell designated houses to firefighters, police officers, teachers, and EMT workers. There are many special requirements that must be met to purchase a home in this program, one of them being you have to occupy the home for three years. Since the property is not eligible for all buyers, some asset management companies list them in MLS and some do not. If you see a property in Hudhomestore, but it is not in MLS, check to see who the eligible bidders are.
How can investors submit a bid?
An investor must use a real estate agent registered with HUD to submit a bid on a HUD home. If you are shopping for an agent and you are interested in HUD homes, ask your agent if their company has a NAID number. If they don’t have a NAID number, then they can’t submit a bid for you. Any office can get a NAID, but it can take up to 6 weeks to get a NAID number from HUD. If your agent’s office has a NAID, they can register on Hudhomestore and submit a bid for you very easily. The bid is submitted online and no documents are uploaded with the bid. HUD does require the social security, tax id or EIN number for the purchaser to submit the bid. Here is an article on how to find a great real estate agent.
What happens after my bid is submitted?
HUD will only respond to your agent through email if your bid is accepted. If your bid is not accepted, HUD will not notify your agent, but your agent can look up the bid status. Your agent has to log in to HUDHOMESTORE.COM and go to bidder functions. They can search for bids they submitted, and HUD will list the bid status. It may say reviewing bids, accepted, canceled or other bid accepted. If your bid was not accepted and no other bids were accepted you can bid again as many times as you like. In some cases, HUD may counter your offer, but their counter is only a notification informing you of what net price HUD will accept. If you enter a bid that nets HUD the counter price or more, they will accept it as long as no one else submits a higher bid.
How low of a bid will HUD accept?
A buyer can submit any bid amount they want on a HUD home, but HUD has certain guidelines they will accept. Those guidelines change in different areas of the country and for different properties. The asset management companies are given guidelines from HUD on what bid amount they can accept. Usually, they are allowed to accept a net amount of around 10 to 12 percent less than asking price (in my area). The net amount is what HUD will receive after commissions and closing costs are paid. HUD always pays the listing broker a 3% commission and the selling broker can get up to a 3% commission. If HUD is paying a 6% commission total, then that net amount they will accept has dropped to 4 to 6 percent less than list price. If the buyer wants closing costs, then that amount drops even further. If a property becomes an aged asset, meaning it has been on the market for more than 60 days, HUD may accept lower bids. In different parts of the country, HUD may accept 20% less than asking price at the beginning of a listing period.
Should you submit low ball bids?
YES! HUD asks all bidders if they can hold their offer in a backup position. This means if an accepted offer cancels, they will automatically accept the next highest bid as long as it is an acceptable amount. It does not hurt to mark this box as you are under no obligation to continue with the contract if HUD accepts your bid. If HUD lowers the price on a property, they will review bids they have already received to see if they are now an acceptable amount after the price change. Your low bid could be accepted before anyone else gets a chance to submit a new bid after the price change. There are also occasions when a low bid that does not meet HUD guidelines is accepted. This usually happens on aged assets that have been on the market over 90 days. The asset management company can ask for special approval from HUD on these low bids. When this happens your agent may receive a counter from HUD in the morning and then an acceptance later in the day. This is because the asset management company could not accept the bid right away, but they sent it to HUD and it was approved later in the day.
How to send in a contract after your bid is accepted
If HUD accepts your bid, they will notify your agent by email and give your agent instructions on how to send the paperwork to HUD. Your agent will have 48 hours to send the original documents to HUD. That 48 hours is extended for weekends and holidays. HUD has their own sales contract, addendum and disclosures, they will require a pre-qualification letter or proof of funds letter if you are paying cash and your earnest money must be sent with the package. HUD requires certified funds for your earnest money. Your agent should be able to help you out with the package and explain all the details. There are a couple of very important documents to pay attention to that I will go over in the next sections. If your package is going to be late, make sure your agent contacts HUD and tells them it will be late and HUD may give you a little extra time. If your package requires corrections, HUD will email your agent and usually, corrections are due within 24 hours.
Buyer Select title company update
HUD has switched to a buyer agent select system where buyers now choose the title company. Buyers choose the title company for the entire transaction and can choose any title company they want. HUD will get the title company registered with HUD, once a bid is accepted and a title company chosen. The asset management companies are handling things differently with some having the listing agent hold the earnest money and some requiring the buyer to send in the earnest money to HUD. Make sure you read the instructions thoroughly for what HUD requires.
Can investors get their earnest money back?
HUD is very clear that they treat investors differently than owner occupant buyers. They feel investors are more experienced in real estate and should do their due diligence before making an offer. HUD makes investors sign a document saying their earnest money will not be refunded for inspection issues. HUD has an inspection done on every home before it is listed, and the results can be found under addendum on Hudhomstore. When HUD does these inspections, many times the utilities are not on and it is always best for a buyer to have their own inspection completed.
HUD may return half of an investors earnest money if their loan is denied, but remember it is very difficult for an investor to get their earnest money back from HUD if they cancel the contract. The earnest money amounts are $500 for contracts under $50,000 and $1,000 for contracts over $50,000.
How does HUD define owner occupied?
The only way a buyer can be considered owner occupied is if the person living in the home will be on the deed when HUD sells the home. That occupant has to live in the home for at least a year and cannot buy anymore HUD homes as an owner occupant in that first year.
What happens to investors who bid?
HUD makes owner occupants sign a document confirming they are an owner occupant and if they are found to be an investor, HUD can fine them $250,000 with prison time. It is a federal crime to misrepresent yourself as an owner occupant when your true intention is as an investor. Not only can the buyer be fined and sent to prison, the buyer’s agent and their entire office can lose their ability to sell HUD homes. If you think you won’t get caught, remember there are many investors who would love to bid on HUD homes but can’t because of owner occupant rules, and they have no problem turning in other investors they see breaking the rules. Listing agents are also encouraged to keep an eye out for investors posing as owner occupants.
How to complete an inspection
HUD has a different inspection policy than most REO sellers. When HUD has a property listed, they do not turn on any of the utilities. When HUD signs your purchase contract, they will email your agent a signed copy with the appraisal and a utility turn-on request form. You have 15 days from the time HUD signs the contract to do your inspection, and they allow you a three-day window to turn on the utilities. It is usually best to make your three-day inspection window as late into the 15 day inspection period as possible. The reason is you have to send in the form to HUD’s property preservation company, wait for them to approve it and then get utilities on in your name. It can easily take over a week to get the form back and get utilities on so make sure your agent turns in the request form as soon as possible.
HUD does not pay for the utilities or any turn on fees and they do not de-winterize the property. In fact, if you live in an area that requires winterization, you will have to send in $150 with your turn on request form if you want to turn on the water during the winter season. Most areas require the winterizations from 10/1 to 4/30. This fee is for the property preservation company to re-winterize the property after you complete your inspections. If HUD found the property’s plumbing system did not hold pressure during an air test, they will not allow you to turn on the water.
If you find issues during your inspection, you have two choices; cancel the contract or proceed with your contract knowing HUD won’t repair anything. They are very clear HUD homes are sold in as-is condition, and they will not make any repairs even if the lender requires it. They are also very clear that they will not return your earnest money if you find inspection issues that cause you to cancel your contract. As I said earlier, HUD does an inspection before listing each property, and the basic results are listed on HUDHOMESTORE.COM. To find the inspection, look under addendum on HUDHOMESTORE and you will see a document called PCR. This will list the general condition of the plumbing, electric, HVAC and roof. Do not depend on these inspections to be perfect! Many times the HUD inspectors are only able to do a visual check since the utilities are not on.
How to do an appraisal
HUD does an appraisal on every home before they list it. HUD used to list every home at the appraised value, but that changed recently. Owner occupants used to be able to use this appraisal if they are going FHA, but now all buyers must get a new appraisal. If your appraiser requires the utilities to be on for the appraisal, you have to follow the same procedure to turn on utilities as you did for the inspection. The best practice is to schedule the appraisal at the same time as the inspection if possible. The biggest issue I see with appraisals is the plumbing. HUD’s inspector will do a pressure check on the plumbing system before the home is listed. If the pressure test fails, it means there is a leak somewhere in the system.
That also means HUD will not let you turn on the water for your inspection or appraisal. If the system fails the pressure test and your appraiser requires the water to be on, you are out of luck. HUD won’t repair the lines and no repairs can be made before closing. Please pay attention to the HUD inspection before bidding and talk to your lender about the appraisal process. I have seen many deals fail because the water could not be turned on for appraisals on HUD homes. If you have already had your bid accepted and you have run into this issue, there are a few solutions. Many times a lender can escrow for plumbing repairs or a portfolio lender may be able to do the loan without utilities being on.
The other issue that may come up is an appraisal comes in low on a HUD home. This is rare, as usually HUD homes are priced low enough that an appraisal value is not an issue. If the appraisal does come in low or the appraisal requires repairs, HUD does not make repairs or price adjustments. Again the only choice will be to cancel or continue with the original bid price and terms.
Different asset management companies give different time frames for closing. Some allow cash buyers 30 days to close and financed buyers 45 days to close. Other companies allow 45 days for cash and financed buyers. If you must have an extension due to your lender or other fault of the buyer, then HUD will charge you for an extension. Typically the fee is $375 for a 15 day extension day but can be lower for lower-priced properties. The exact fee schedule is listed on one of the HUD forms you will sign. HUD will grant two extensions, but if a third is needed HUD will need proof that closing is imminent or they may not approve the extension.
Another difference with HUD is HUD does not pay for the buyer’s title insurance. Make sure you factor that into your figures when bidding on a HUD home. HUD does not require title insurance, but I highly recommend you get it. HUD does the best they can, but they are dealing with other lenders homes that were foreclosed on and had FHA financing. Sometimes a title issue will slip through the cracks, and if you don’t have title insurance it can be a nightmare to get it cleared up. I sold a HUD home a few years ago that was owned by a large bank. 6 months after the sale, we learned the bank did not have clear title. The title company was able to clear it up, but if the buyers did not buy the insurance it would have been on them to figure out clear title.
Can repairs be made prior to closing on HUD homes?
HUD is very clear that they will not make any repairs prior to closing and the buyer is not allowed to alter the home in any way before closing. Some buyers may think it is not a big deal to fix a small plumbing leak or do some painting before closing. It is a very big deal! HUD homes are federal property and it is a felony to make any alterations before you own the home. If HUD finds out any repairs were made, they usually cancel the contract on the spot, take the buyer’s earnest money, investigate the buyer’s agent to see if they knew about it and then consider charges depending on the severity. Do not make any repairs, change the locks, remove signs or anything from the home before closing!
Those are the basics for investors purchasing HUD homes. Feel free to comment or email me with any other questions about HUD homes or my investment strategies! HUD homes can be a great way to buy homes at below market value if you stick to the rules.
How Long do you Have to Live in a HUD Home as an Owner Occupant?
I am a HUD listing broker and I have written many articles on buying HUD homes. I cover many topics in my HUD articles, but I am asked over and over about the owner occupant rules. HUD has very unique and specific rules on who can bid on their homes and when they can be bid on. For more detailed information on the HUD process check out the owner occupants guide to HUD homes and the investors guide to purchasing HUD homes.
When can owner-occupants bid?
Owner occupants have a distinct advantage when bidding on HUD homes. HUD allows owner-occupants to bid on HUD homes before investors can bid on HUD homes. On FHA-insured HUD homes, there is a 15-day owner occupant only bid period. Without going into the detail that I do in my other articles, FHA-insured HUD homes can get an FHA loan if the property needs less than $5,000 in repairs. On FHA-uninsured HUD homes, there is a 5-day owner occupant bid period. FHA-uninsured HUD homes have more than $5,000 in repairs needed and cannot go FHA unless you use an FHA 203K loan.
When can investors bid?
With FHA-insured HUD homes, investors can bid on the 16th day after the home has been listed. On FHA-uninsured homes, investors can bid on the 6th day after the home has been listed. Investors need to be careful when bidding on HUD homes because HUD has serious penalties for investors pretending to be owner occupants. An investor who is caught pretending to be an owner occupant can face up to 2 years in federal prison and up to a $250,000 fine. For more information on my investing strategy which includes fix and flips and long-term rentals check out this article.
Who does HUD consider an owner-occupant?
HUD has very specific rules on who an owner occupant is. To buy a HUD home as an owner occupant you must live in the home more than 50% of the time. You can’t buy a HUD home as an owner occupant if you are buying a second home or using the home as a vacation house unless you will live there more than 50% of the time.
Not everyone who will be buying the HUD home has to occupy the home for at least a year. Just one person who is on the deed at the time of the purchase has to occupy the home. If parents are buying a HUD home for their child, they would be considered owner-occupants if the child was on the deed and would be an owner occupant.
How long do owner-occupants have to live in the home?
An owner-occupant must live in a HUD home for at least one year before they can sell or rent the home. HUD does allow an owner occupant 60 days to repair a home before they move into the home, but they still must occupy the home for at least a year after they move into the house. In certain circumstances such as a medical emergency or a job relocation, you an owner occupant may be allowed to move sooner than one year.
Under what circumstances can an owner-occupant sell a HUD home prior to living in it a year?
HUD allows owner-occupants to move out of a HUD home prior to living in the home for a year if they meet certain guidelines. It is always best to call HUD if you have to move out of a HUD home early as an owner occupant. If an owner occupant has a change in location for a job, a death in the family, divorce, loss of a job or other extenuating circumstances, HUD may ease the owner occupancy requirement.
Why does HUD give priority to owner-occupants over investors?
HUD homes are homes that were bought by someone using an FHA mortgage. The mortgage was foreclosed on and since FHA is a government program, the property went back to the government. FHA is a program sponsored by the government that is meant to allow more owner-occupants to buy homes. The government transfers the idea of getting more owner occupants buying homes into the HUD home program. HUD would prefer if all of their homes were bought by owner occupants, but that is not possible.
Can investors still get a good deal?
Even though owner occupants are given priority on HUD homes, investors can still get a great deal. FHA-uninsured homes are a great opportunity for investors to get a great deal. These homes usually need a lot of work and many owner occupant buyers cannot get a loan on these properties.
Investors also need to be aware that many owner occupants cancel on their HUD contracts. If an owner-occupant cancels on their HUD contract, that may allow an investor to bid on the home.