The McAllister Team Blog

This month’s Item of Value concerns recent home trends and outdoor living.  If you have questions about the local real estate market, give me a call at 937-390-3715, or email me at Chris@RealEstate2.com.  Check out our newly updated website at www.TheMcAllisterTeam.com.  Follow us on Twitter too at www.Twitter.com/McAllisterTeam . 

HUD Homes – Once In a Lifetime Opportunity

            What if you could purchase a home that was listed for less than any other house in the neighborhood and the only thing it needed was paint, maybe some new carpet, and a lot of elbow grease?  What if that house was already priced at less than half of its appraised tax value?  And, what if you could buy that house today for 70 to 75% of the listed price?  Sound too good to be true?  It’s not.  Welcome to the world of HUD foreclosures.

A Quick Case Study

            Here is a case study of a purchase a couple made a few months ago in Springfield, Ohio.   The buyers were soon to be married and were looking for a house in Springfield because of the ease of commuting for school, work and seeing family both east and west of town.  They were on a budget and liked the east side of the city.  

            A two story property of just under 1800 square feet caught their eye.  It was in very good shape and really just needed a coat of paint and a good cleaning to make it shine.  They expected some minor plumbing problems and planned financially for a few ‘unknowns’.  They wanted a good deal, but they did not want to buy a money pit either.

            The house was listed for $50,000.  It had been on the market for just a few days.  The county valued the property at $110,000 for tax purposes. 

            The buyers decided to make an offer of $35,000.  Their bid was not accepted so they raised their offer to $38,000 the next day.  Their offer was accepted at $38,000, almost 25% off the list price and over 65% less than the county tax appraisal.

            Thanks to the buyer’s market we are in right now, these young people are going to start their life together on solid financial footing.  If they choose to move after completing school, they should be able to clear a substantial amount of money when they sell.  Their other alternative down the road is to hold on to the house, and the equity, and rent it out – letting their tenants pay down their mortgage.

How HUD Properties are Marketed

 

            HUD Homes are properties that the federal government, through the Department of Housing and Urban Development (HUD), have taken back in the foreclosure process and returned to the market for sale.  The Department of Housing and Urban Development (HUD) hires third-party private contractors to preserve, protect, and make their inventory readily available for sale.  These third-party contractors are also charged with completing the purchase transaction with a new buyer.  Currently, National Home Management Solutions is the third-party contractor servicing HUD homes in Ohio.

These third-party contractors are also referred to as “broad listing brokers” or BLB’s.  The BLB hosts the websites linked to the www.hud.gov site for each state for which they are responsible.  Ohio properties are available for view at www.NHMSI.com.  Some BLBs have contracts to service more than one state. 

The BLB is also responsible for hiring “local listing brokers” (LLB’s), local real estate brokers who are selected to market the properties in a given area.  Thus, you will see real estate “for sale” signs in front of HUD properties just as you would any other property.  These listings appear in the local Multiple Listing Service (MLS) and are available for view on websites such as www.Realtor.com.

 

Purchasing HUD Houses

     For the first 10 days of a listing, HUD only allows owner occupants, government entities and non-profit organizations to bid on their properties.  After 10 days, investors are allowed to place bids. Owner-occupant purchasers must certify that their intent is to live in the property.  Owner-occupants cannot resell a property for 12 months.  The penalties for buying a HUD property as an owner occupant without the intent to occupy it are severe.

The plus here is that owner-occupants get a chance to purchase these properties without competing against investors.

New HUD properties are generally listed on a Friday.  New price reductions are taken on Friday’s as well.  Prices on HUD homes are reduced every few weeks.  An owner-occupant-only period occurs again with every price reduction.

Financing

            Buyers must submit proof of funds if paying cash for a property, or a pre-approval letter if they are financing a property, at the time an offer is made.  Many HUD homes are in such good condition they can be financed as any other home.  Other HUD homes will require more extensive repairs before a bank or mortgage company will lend against them.  The solution to financing a home that needs work is an FHA 203k loan.

An FHA 203K is a traditional FHA loan with a renovation feature.  This loan allows the cost of repairs and upgrades to be rolled into the loan amount.  These loans generally take longer to close, but HUD allows up to 60 days to complete a transaction, and if more time is needed, extensions can be negotiated. As with all FHA loans, the down payment requirements are minimal and the interest rates favorable.  See your Realtor for more information about lenders who make these types of loans.

 

How Much Should I Bid?

            The answer here is completely dependent on your personal situation.  There are times when a new listing is priced so well that it will attract multiple buyers.  You need to determine what the property is worth to you and make your highest and best offer up front.

            But what if a new listing, or an older listing that just had another price reduction maybe isn’t so ‘hot’, or priced just a bit higher than you want to pay?  Or maybe you are just holding out for an incredible deal?  Well, there are no hard and fast rules, but we are seeing bids being accepted for as low as 70% to 75% of the listed price.  So, like our buyers in our earlier case study, great buys can be made, provided there is nobody else out there who is bidding higher than you that day.

            That in a nutshell is the essence of the bidding process.  If you are the only bidder, you can get a great deal, maybe the deal of a lifetime.

 

Realtor Commissions on HUD Homes

            Ok, this is a little complicated and completely different from any other type of home purchase.  First of all, let me make this clear, all real estate commissions are negotiable.  Second, the bid that HUD accepts must be inclusive of the selling agent’s commission, as well as buyer closing costs if the buyer wants to request HUD to help with those.  Third, your Realtor is going to be worth a lot more money than they are going to get paid if you make the deal you want to make on a house.

An agent placing a bid on a HUD house can request a commission of up to 10% of the purchase price depending on the list price of the house.  The higher the list price, the less commission the agent can choose.  Generally the maximum commission HUD will pay is 5%.

10% may seem high, but many of these houses sell for less than $10,000.  10% of $10,000 is $1,000.  $1,000 is generally the minimum selling commission banks pay when an REO property successfully closes.  The commission is split between the brokerage and the agent involved.  Please keep in mind; it is the same amount of work for an agent to sell a $12,500 home as it is for him or her to sell a $125,000 home.

The Bidding Process

 

Individuals cannot place bids on HUD houses, only state-licensed real estate agents working with approved real estate brokers can do that.  The local listing broker (the brokerage whose name is on the yard sign) can place bids for you; however, buyers may work with any Realtor® they choose to. 

Your Realtor will help you fill out a purchase offer.  As stated above, a pre-approval or proof of funds is required at the time the offer is made.  HUD also requires a minimum of $500 earnest money to be held by the selling broker with each transaction.  The earnest money is returned if the buyer’s bid is unsuccessful.  HUD also allows purchases to be contingent on favorable inspections.  HUD is not going to force a buyer to purchase a home with defects that were not readily apparent at the time the offer is made.

The actual process of presenting HUD an offer is different from presenting an offer to a private seller, or a bank on an REO property.  The actual bid is placed on the BLB’s website by your Realtor.  There is no seller to talk to or negotiate with.  It is a strictly ‘by the numbers’ transaction. 

The great thing about the process is you know if your bid was accepted usually by 4:30pm the next business day.  If the property you bid on still shows as being available, your bid was not accepted, however, neither was anyone else’s.  This mean you have an opportunity to raise your bid and try again.  If the property is no longer available for sale, it will appear under the ‘bid stats’ section of the website.  This is where the information about the winning bid will appear. 

            Once you have placed a winning bid, your Realtor will print the necessary purchase contracts and addendums from the website.  This sounds easier than it is.  The HUD sales paperwork is extensive and must be completed perfectly – after all, we are working with the federal government. 

Even Realtors experienced in selling HUD properties have paperwork returned with minor mistakes from time to time.  These notices are accompanied by tight deadlines for completion.  Missed deadlines can result in a winning bid being negated and the property going back on the market.  So, be patient with your Realtor and understand that we are dealing with a big government bureaucracy.

This Seems Too Good To Be True!

Why wouldn’t everyone be buying these properties at these prices?  One reason is, it is a more difficult process than purchasing a home from a private seller. However, with more and more HUD foreclosures on the market, the process is becoming more routine.

The truth is not every buyer wants to buy a home that needs work, or they may be under a tight deadline to purchase.  We have had buyers we have worked with for months, patiently watching the new listings every week for a property that meets their needs.  For those people with a little time, a willingness to see the possibilities in the property, and are prepared to make an offer quickly when the right house comes up, HUD properties can indeed be the deal of a lifetime.