If you are an investor considering expanding your portfolio, purchasing HUD homes can be a potentially profitable option.
Table of Contents
- What Are HUD Homes?
- How Do I Buy an HUD Home?
- Financing HUD Homes
- Pros and Cons of Buying a HUD Home
- Closing on a HUD Home
- Recap
In this article, we will look at the best tips and tricks when it comes to purchasing HUD rental homes. The resources below will help you find the best properties and make the most successful real estate decisions.
What Are HUD Homes?
To understand exactly what HUD homes USA are, you must know what the acronym stands for. Basically, HUD is an abbreviation for the Department of Housing and Urban Development. It is a federal agency that primarily handles how individuals can access affordable housing in urban areas across the country.
Additionally, the Department of Housing and Urban Development is responsible for helping aid those who may need financial assistance when it comes to renting properties. It is meant to help low-income individuals be able to afford to house.
When it comes to HUD homes, they are foreclosed properties that were originally purchased through an FHA loan. When it happens, the FHA then pays the remainder of the mortgage or loan and takes the property from the owners. Then, the property is considered a HUD home.
After the homes are seized from their owners, they are then put back into the housing market and are sold as-is. It means no repairs, renovations, or upgrades. Additionally, the properties are usually sold under market value.
HUD homes can be any type of property; they are not just limited to traditional houses. Other common HUD properties on the market include trailer homes for sale and a duplex for sale.
Can Anyone Buy an HUD Home?
In order to be eligible to purchase a HUD home, you simply just need to have the funds in order to buy one. Or, if you are able to get a loan approved, you would be able to buy HUD foreclosed homes. Basically, as long as you have the proper means, you will be able to successfully purchase a HUD house.
Typically, such types of homes are offered first to buyers who plan to live in them themselves, rather than rent the property out to others. They are called owner-occupant buyers. If the homes do not sell or are not attracting the intended types of buyers, then they are offered to anyone.
One key thing to note is that if you are an owner-occupant buyer looking to buy an HUD home, you must live in the property for at least a year after the purchase date. Also, they must not have purchased another HUD home in the last two years.
How Do I Buy an HUD Home?
Finding HUD homes for sale can sometimes be tricky for real estate investors. It is because owner-occupant buyers have priority to purchase such types of homes before investors get the opportunity to do so. On average, owner-occupant buyers are given 30 days to place a bid on HUD foreclosure homes before investors can do so. Such restrictions can make it difficult to buy one as an investor.
If you are an investor lucky enough to get the opportunity to find a home for sale, you will need to move quickly to buy the listing. It is wise to make sure you are prepared financially so you can act fast. It includes ensuring you are approved for a mortgage loan if you need one. You must also have enough money to cover closing costs.
Aside from money, having a home inspector on call is a good idea so you can complete a property inspection as soon as possible once your bid is accepted. Make sure to add a home inspection contingency in your bid.
As an investor, it is also a smart idea to have a plan in mind when purchasing a HUD property. As a foreclosure, it is likely there will need to be renovations done before the tour listing is ready for the market. Coming up with a plan once you see the property is a great way to be ahead of the game once the title of the listing becomes yours.
Related: The 2022 Investor’s Guide to Buying Properties on HUDHomeStore
Financing HUD Homes
Whether you are a real estate investor or a home buyer, there are different financing options that can come in handy when purchasing a HUD home. Typically, there are more financing options available for HUD homes as an incentive to get people to purchase them. Below are some of the most popular financing options for HUD properties:
1. Housing Choice Voucher Program
The Housing Choice Voucher Program is also known as Section 8 housing. Overall, it helps low-income individuals or families be able to afford to purchase a house. It means the buyers receive monthly aid to help them pay their mortgage on time and in full.
2. Good Neighbor Next Door Program
The Good Neighbor Next Door financing option helps people in the community who are public servants. Qualified public servants include teachers, emergency medical technicians, firefighters, police officers, etc. The program helps the said individuals afford housing by offering a discount on the purchase price of the property, typically around 50%. However, it only covers certain areas in the US.
3. One Dollar Program
The One Dollar Program makes HUD homes available for just $1 to low-income families. However, it only applies to homes that have been on the market for over six months.
4. HUD $100 Down Program
The HUD $100 Down Program allows low-income families to forget about the typical 3.5% down payment on a house and lets them put only a $100 down payment instead. It makes homeownership possible for owner-occupant buyers who typically cannot afford the down payment.
5. Non-Profit Program
In this program, non-profit organizations are eligible to purchase HUD homes for 30% off the listing price. Then, they are able to fix and repair any damages to the home and resell them to lower-income families.
6. Other Financing Options
Aside from the programs listed above, there are other financing options available for purchasing HUD homes. The more typical options are VA loans, FHA loans, mortgages, and USDA Rural Development loans. It is always a good idea to speak to the housing authority that usually handles such types of loans. It will help you find the one that works best for you.
Related: FHA 203k Loans: The Basic Guide for Real Estate Investors
7. Rent To Own
As an investor, a good financing option to offer to renters once you’ve purchased the HUD home is rent to own. Rent to own homes means that renters will pay you to rent for a period of time before taking ownership of the property. It can be a good investment strategy for an HUD property.
Pros and Cons of Buying a HUD Home
When you purchase any type of property, there are always several things to consider. You want to make sure you purchase the right property for your wants and needs. You must also consider every positive and negative aspect of the listing. Below are some pros and cons of buying a HUD home.
Pros of Buying HUD Homes
Below are some of the major benefits of purchasing a HUD property:
1. Lower Price
HUD homes are typically sold at a much lower property price due to the fact the homes are foreclosed properties. The goal is to sell the home as quickly as possible to recover their money quickly. Therefore, the properties are often sold at a lesser price than other similar homes on the real estate market.
2. Closing Cost Assistance
When you purchase a HUD property, typically, they will pay around 5% of the closing cost fees. It helps to make the property more affordable to people and sell it as quickly as they can.
3. Lower Down Payment
HUD wants to sell the homes as fast as possible, so they offer incentives to the people who purchase them. In some cases, they require lower down payments on the property to make buying a home more affordable. On special occasions, certain programs almost completely eliminate down payments altogether.
4. Less Competition to Purchase
Unlike other properties, HUD homes select the buyer through a computer-generated system. The system doesn’t account for certain contingencies with your offer, how you plan to finance the home, or how much you are able to put down on the house.
The system simply picks its buyer based on the highest net profit it can generate. It may make it easier to purchase a HUD home than to compete for other homes in the highly competitive overall real estate housing market.
Cons of Buying HUD Homes
Below are some of the drawbacks that come along with purchasing a HUD property:
1. HUD-Approved Real Estate Agent
Unfortunately, if you are looking to purchase a HUD property, you must use an agent who is approved to sell such types of homes. Not every agent may be qualified to sell HUD homes. Always double-check if your agent is registered with the correct agency before bidding on a HUD house.
Related: The 9 Best Real Estate Agent Directories
2. HUD Homes Are Sold As-Is
Unlike other homes in the housing market, when purchasing a HUD house, the property is sold as-is. It means you get whatever you see, and you cannot request changes to the listing. It is because the homes are foreclosures, and the agency will not consider negotiating on such types of houses.
3. Selling Restrictions
If you buy a HUD home, you must adhere to certain restrictions after the purchase is completed. An owner-occupant buyer must live in the home for at least one year after buying the property. Additionally, they are not eligible to purchase another HUD home until at least two years after the initial purchase.
4. Repairs and Renovations
Even though HUD houses are sold lower than the market price, it doesn’t always mean they will be cheaper in the end. Typically, such types of properties need upgrades and renovations as they are sold as-is and are foreclosure properties. When you consider all the additional costs, they may not be less expensive than other homes on the market.
Closing on an HUD Home
Once you’ve decided that you want to purchase a HUD home, you need to place a bid for your preferred property. A computer program will evaluate your bid and approve it if it is the highest one. Once your bid is approved, it will usually take up to 30 days for the entire closing process to finish. During the waiting period, the buyer will be responsible for finding an insurance company and getting the title to the house.
As an investor, you also must prepare for certain renovations you want to do once the property officially becomes yours. It will let you fix the property quicker and get it ready for the rental market. It is a good idea to get your team ready to go with a plan once the title of the house becomes yours.
Be prepared in advance for certain renovations once you take full ownership of your HUD home. It will help you get it ready for the rental market quickly if you plan to rent it out.
Recap
A HUD home can be a great way to purchase a home in the tricky real estate housing market. Investors looking for income properties can take advantage of HUD homes and realize a high return on investment.
It is essential to always make sure you know all of the benefits and drawbacks before buying such types of properties. Although they can be a little cheaper to purchase, you must understand some of the reasons for doing so and be prepared for the renovation costs.
Mashvisor knows how complicated it is to navigate the real estate housing market. That’s why we offer tools for investors to make the entire process smoother. Our platform helps you find the best investment properties that fit your wants and needs.
We also help you see how successful your property can be before you commit to the purchase. We use reliable data from trustworthy real estate platforms like the MLS database to ensure you make the most profitable decisions.
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