HUD Homes 101: What Every Real Estate Investor Needs to Know – Part 1

Today’s post is all about…you guessed it…HUD homes.

There is much to uncover in this two-part blog series…what are HUD homes, what does the investing process entail, how do you find HUD homes, etc…But first, let’s touch on the basics of this type of property.

Simply put, the term “HUD” refers to the U.S. Department of Housing and Urban Development.

A“HUD home” is a 1-to-4-unit residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage. HUD then becomes the property owner and offers it for sale to recover the loss on the foreclosure claim.

ANYONE, who has the required cash or can qualify for a loan (subject to certain restrictions), can BUY a HUD home.

If you’ve never dealt with HUD homes, try going online to the HUD Home Store site where you can search for these types of properties. This site allows you to search anywhere in the US, which gives you the ability to scale up your business and dive into other markets – something you’ll hear me talking about A LOT.

My suggestion for you is that if you either aren’t in an additional market or you’re intending to get into an additional market in the near future, get in one NOW. The sooner you expand your horizons, the sooner you’ll grow a truly resilient and scalable business!

The Bidding Process

Time to dive a little deeper…

Let’s say you’ve discovered a deal you like – you’ll subsequently connect with a HUD-registered real estate agent from which you can then make offers.

HUD homes, however, are FIRST made available to owner-occupants.

HUD does this because, if the Federal Government is going to take a hit on the property from having insured it and turning it into a foreclosure, they figure that any kind of bargain or savings that comes along should first be offered to owner-occupants.

After all, HUD is all about the American dream of homeownership.

After being offered to the owner-occupants… some of them are offered to police officers, firefighters and teachers at 50% of the listing price…After that, to HUD-approved non-profit organizations…Then FINALLY, the general public, which includes YOU (the investor).

Some investors get discouraged by this process, thinking if they’re offered to everyone else first, then all we get are the scraps!

In a way…that’s true. We get what owner-occupants DON’T want.


The Uninsurable

HUD homes that will not sell to an owner-occupant are when they are labeled uninsurable. This means HUD is unwilling to insure a new mortgage on this property; usually due to the condition of the property.

Simply put—they won’t insure junkers. And it’s junkers that we WANT.

If HUD will not insure it, then the bank will not lend on it.The uninsurable HUD homes are the ones we want to go after.

The Waiting Game

There’s no avoiding it…in many cases you’ll have to wait a while for the price of the home to come down to where it makes sense for us. When that’s the case, it’s a process; a waiting game. Other times the initial asking price works.

Case in point…

One time, I found a HUD property that I liked and decided to make an offer on it. But…I was outbid.

If there’s more than one bid, and the higher bidder meet’s HUD’s minimum takes the cake (that’s assuming that they’re qualified, have proof of funds and can back up that proof of funds.)

What happened in this instance is that the other buyer who made the offer couldn’t perform and ended up cancelling the contract. It went back on the list, and so I jumped back in and made another offer.

Patience is a virtue, huh? You never know what twists and turns will happen in investing!

But, remember this…

One thing you have to watch out for is fees and closing costs. You may be offering $102k, but the deal could actually end up costing you $105k or more, all due to closing costs. Make sure that when you place your offer, you understand exactly what expenses you’re going to incur.

Proof of Funds

Of course, you DO have to show proof of funds.

I offer proof of funds as part of my REI Trifecta program (amongst many other powerful tools and benefits), and I offer 3 Proof of Funds letters too. Click here and learn how to use the REI Trifecta to do more deals in today’s market – it’s free!

These 3 unique letters are for:

  • Private sellers
  • Bank sellers
  • Government sellers (like HUD)

Always be sure to use the correct Proof of Funds (POF) letter for the seller you’re dealing with.

The HUD “Language”

The HUD letter has a very specific language.

By paying attention to our clients and working with closing agents, we have learned that this language is not only important, but required. This allows HUD to accept our POF and your offer.

The proof of its effectiveness is the number of HUD deals that we are currently funding for our client. In fact, as of this writing the majority of deals that we are currently funding are HUD houses.

The client makes their offer, the bid gets opened, the bid gets accepted, and then they’ll require a bank statement.

I do this on an almost daily basis; it’s something I don’t delegate. I have a significant bank account that I use just for this purpose.

Coming Up

In next week’s Part 2 of this blog series, you’ll learn even more about the process of investing in HUD homes. We’ll go over inspection, closing, working with Realtors and more…

Stay tuned!

What Are Your HUD Experiences?

If you have had any HUD home buying experiences—good or bad—I’d like to hear about them. Please leave your comments below!


Cameron Dunlap

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7 thoughts on “HUD Homes 101: What Every Real Estate Investor Needs to Know – Part 1

Back in the late Eighty’s I bought 7 or 8 Hud Homes lived in first one & rented out the other’s. At that time if you were the successful bidder you could buy the home with a
$3 K Down payment & of course loan qualification.

You can buy them that way as an owner occupant. With 3% down now which is often less than $3,000. The problem is if you say you’re going to live in it and then don’t, you are playing with fire and will all but certainly get burned.

Yes, I have aquired several hud homes over the years and have found that it is not for the faint of heart. These homes can have several unaddressed issues that are are not always readily observable and like you said earlier, you do need patience to pursue these homes.That being said, it is an exciting and rewarding experience after you educate yourself about the process, knowledge is key.If you have a handyman or handywomen mentality, these homes are worthwhile because everyone of these hud homes that I have purchased needed a lot of small projects done to them before they can become livable and if you had to pay a contractor to complete all the work you will see very little equity.Thank you for the article and the topic.

Every junker house has the potential for there to be issues that are not always readily observable. This is by no means reserved for HUD foreclosures only. As to fixing them yourself, I don’t recommend that because it’s not the best use of your time – assuming you want to be in the business of Real Estate Investing. I have bought many HUDs over the years where the repairs were done by contractors/handy persons and there were substantial profits left. If you’re finding that the only way to make money on them is to do the work yourself, I would suggest that you’re paying too much.

I’m kind of partial to HUDs because my very first deal was on a hud foreclosure in 1993!

Hey Cam, I worked the HUD homes market for 6 months religiously and had a formula that was supposed to help me succeed in this effort but after 6 months all the houses that I was bidding on sold at a much higher price than my bid and were nearly sold at market retail value. It looked to me like there was NO room for a prophet. So I moved out of the HUD arena.

My guess would be that your ARV’s were too low, your repair estimates were too high or worse, both.

When Looking at HUD house, they state an asking price, is that price the starting point or can you offer lower?

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