Investing in HUD Homes: The Basics

There are so many different real estate investment opportunities out there, and real estate investors should make it their mission to know about as many as they can. Real estate experts recommend conquering one real estate niche at a time, and maybe you’ve found that it’s time for you to be investing in HUD homes.

If so, you’ve come to the right place!

Investing in HUD homes is different from investing in traditional real estate. It’s even somewhat different from buying a foreclosure from a bank. If you want to get the most out of investing in HUD homes, it’s a good idea to understand exactly what HUD homes are and how to purchase one. Let’s answer some questions about the basics of investing in HUD homes.

What is an HUD home and how does it differ from a foreclosure?

If you’re investing in HUD homes, you need to know exactly what they are! HUD homes are not the same as a typical foreclosure. A typical foreclosure was bought with a conventional loan from a bank or a private lender. HUD homes were purchased using a Federal Housing Administration (FHA) loan. The owners of both types of investment properties were unable to make payments on their mortgage, and so the property is foreclosed, and the lender becomes the owner. In the case of typical foreclosures, the bank becomes the owner, and with HUD homes, the Department of Housing and Urban Development (HUD) becomes the owner.

While HUD homes are technically foreclosures, the owner of the investment properties differ. There are other differences between HUD homes and foreclosures, and as we discuss the details of investing in HUD homes, they will become apparent.

For more information on buying a foreclosure, click here.

What is the difference between insured HUD homes and uninsured HUD homes?

When researching investing in HUD homes, you’re bound to come across two types: insured HUD homes and uninsured HUD homes. It’s really crucial that you understand the difference, as it will 100% affect a real estate investor. The difference comes from the inspection that the HUD performs on the investment property after it is foreclosed, but before it is listed on HUDhomestore.

Insured HUD Homes

HUD homes get the label of insured if the inspection finds that any needed repairs are less than $5,000. This includes repairs for livability only, not upgrading or remodeling.

Uninsured HUD Homes

Uninsured HUD homes are investment properties that require repairs that will cost more than $5,000.

So, when investing in HUD homes, which do you go for? First and foremost, the real estate investor has to know that the HUD will not make any repairs and is not responsible for the condition of HUD homes. It truly depends on your unique situation then which type you choose, but here are a few suggestions:

If a real estate investor plans to finance HUD homes with an FHA loan, then he/she should avoid uninsured HUD homes. This is because the FHA won’t approve a loan for an investment property that requires so many repairs. The FHA doesn’t only consider the value of an investment property when approving loans, but the general livability as well.
If a real estate investor plans to finance HUD homes with a conventional loan or with cash, then uninsured HUD homes can be a great way to get a high return on investment. Conducting the repairs needed increases the market value.
Insured HUD homes are the route with less risk and less of a headache for the real estate investor. Whatever the repairs might be, they won’t eat into your budget, and you won’t have to worry about getting a separate loan for rehabilitation.

How can real estate investors finance HUD homes?

This question has a short answer: real estate investors have the option of using any kind of financing when investing in HUD homes. As long as the HUD homes meet the guidelines of the lender for the loan, real estate investors should have no issue. If the HUD homes need a lot of repairs that a real estate investor can’t afford, FHA 203k rehabilitation loans might be an option.

Where can real estate investors find HUD homes?

If you plan on investing in HUD homes, you need to know where to look. You have a few options to turn to:

HUDhomestore: The best source when investing in HUD homes will be HUDhomestore. HUDhomestore will list all of the HUD homes as well as any key information about them. You’ll also be able to see information about bidding.
MLS listings: While not every HUD home that is listed on HUDhomestore is listed on MLS, many of them are.
Real estate agents: When investing in HUD homes, you’ll need a real estate agent down the line anyway. So, if you choose, you can use a real estate agent right from the start and let him/her find the best HUD homes for you. HUD lists the investment properties with local real estate agents as well as HUDhomestore.

How do you purchase HUD homes?

Investing in HUD homes requires that you buy the property through an online auction on HUDhomestore. The process of bidding isn’t too complicated, and there are only a few key points to know:

Investing in HUD homes requires a real estate agent who is registered with HUD. If he/she has a NAID number, a real estate agent can easily register on HUDhomestore. The real estate agent will place the bidding for you on HUDhomestore, as you cannot on your own.
The auction for HUD homes has a period that only allows owner-occupants to bid. Real estate investors are not allowed to bid during this period and can be heavily fined if they do under the guise of being an owner-occupant.

Insured HUD Homes: A period of 15 days. On the 16th day, real estate investors can place bids if the home is still available.

Uninsured HUD Homes: A period of 5 days, and on the 6th day, real estate investors can begin to bid for the investment property.

This information can easily be found on HUDhomestore so that real estate investors can track the days for each HUD home.

Once the bid is placed on the investment property, your real estate agent will track the offer. If it’s accepted, HUD will contact the real estate agent by email. While your agent won’t be contacted directly if the bid is rejected, the status of the bidding on HUDhomestore will clue you in.
If the offer is accepted, your real estate agent will be informed on how to handle the paperwork with HUD.

Should you get an inspection of the HUD home?

An inspection is an absolute must when investing in HUD homes. Initially, HUD does an inspection of the HUD homes. You can find this information on HUDhomestore, but it will be very basic information. Get your own inspection done, and if the home has issues, you can back out of the contract. Just know that you can lose anywhere from $500-$1,000 (the amount paid for confirming the contract) when you cancel the contract. But that’s probably a small amount compared to the loss you’d suffer from such real estate investments. All of this information is listed clearly in the guidelines on HUDhomestore.

Why should you start investing in HUD homes?

Investing in real estate, in general, has many benefits for the real estate investor, and HUD homes aren’t any different. One major plus for HUD homes is that the HUD appraisal conducted before the home is listed prices the HUD homes at lower than market value. This is a general trend with HUD homes, and a real estate investor could make a killing in return on investment with the right deal.

Now that you have the basics of investing in HUD homes, what are you waiting for? Visit HUDhomestore, search the HUD homes, and find a great real estate investment today!

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