What is a HUD home?  It is a home owned by the Housing and Urban Development administration which is a part of the Executive Branch of government.  In some areas, HUD builds homes and if you see one advertised it could be owned by HUD for a variety of reasons.  In my experience here in Middle Tennessee and Nashville, most HUD homes are normal single family homes (or condos) that were financed with an FHA loan (Federal Housing Administration).  The seller falls behind on payments and then is foreclosed upon and then HUD takes ownership.  Not all foreclosures are HUD homes.

My perspective to share with you today is from a buyer’s agent representing a buyer.  A buyer’s agent first needs to go to the website for HUD’s properties for sale in TN and take a tutorial.  It isn’t a bad place for the buyer to go either. At this site you’ll find all the info you need as to how to purchase or help your client purchase a HUD home.  I’m not going to be dry and boring….if you want that…go to Pyramidrealestate.com…I’m going to point out small details that could turn into huge details if you don’t pay attention to them.

First you’ll need to go to the website and register.  As an agent, you’ll need to have your nrds number as well as your brokers.  After you set up the account, you can search for properties.  Once you find a property you don’t get to just put in an offer.  You must put in a “bid” online at the Pyramid site.  If the listing is new to the market, they will only accept bids from owner/occupants.  I guess they would prefer to sell to an individual that plans on making the HUD property their home.  After the first 10 days, they will take bids from any party.  Do not be fooled…the agent of record in the multiple listing service really has nothing to do with the entire transaction.  You might as well not even call them.  From my experience, they merely list the property in the MLS for a fee.

Before we get ahead of ourselves….try to judge whether or not your client (or if you are the client) REALLY wants the property.  HUD actually recommends doing a home inspection BEFORE you even do the bidding process.  The entire process is really tilted to be in the favor of HUD.  Always remember that HUD is offering all of their properties as-is, where-is and that they do NO repairs.  First, have your client inspect the lengthy disclosure packet that HUD has posted for all of its listings.  This is basically a home inspection report (with all of the vagueness that reports entail) done by HUD beforehand.  HUD recommends you get an independent one beforehand, however, what buyer wants to cough up $300 without knowing “if” they will even get the property under contract.  You can do a home inspection AFTER the bid has been accepted and the bid has turned into a contract, but you must submit a “home inspection request” form.  They should allow you to do this request and usually the term is that the inspection should be done within 15 days of going to contract.  Here are the sticky parts for a buyer.  HUD homes never have the power, water, gas or any utilities on.  The buyer is required to have the utilities turned on at their expense and at their inconvenience, meaning they are the ones (with their Realtors because they are not allowed to be inside the property without you) that have to be there to meet the water/electrical companies.  You are only allowed to have the utilities on for a period of 48 hours AND if the house is winterized, the buyer has to prepay $75 to have the home re-winterized after the inspections are concluded.  On top of that, if you find something objectionable with your independent report AND you are already at contract “HUD may at its own discretion” refund the earnest money.  I never could get anyone over the phone or via email to really get specific as to how their discretion normally goes.  They did repeatedly tell me that if the buyer’s used anything in the original disclosure to not buy the house that their earnest money would be forfeited–but I’m getting ahead of myself.

OK-so HUD has received your bid.  Don’t even get to this point if your buyer isn’t pre-approved in a 100% iron-clad way.  You will go through a ton of work for nothing if you do.  They are quite specific on how the preapproval letter should look too.  It must be on company letterhead with a physical address, if it is FHA financing it has to include the specific type of FHA financing, and it must have the name and signature of the lender.  So you buyers out there….don’t push your realtor to look at HUD homes unless you have done your homework. HUD may keep all bids until that time in which they compare all bids and then choose the best one.  In this market, your bid is likely the only one but if they have significantly lowered the price it could be a competitive situation.  Once you find out that HUD accepted your bid, you then fill out the purchase agreement online with their stock contract, print and have the buyer sign it along with 10 or 15 pages of disclosures.  You must get the signed PA back to HUD and an earnest money check of $1000 made out to the buyer’s agent’s company within 48 hours of having your bid selected.

Yeah, now you are at contract!

Go to the above paragraphs talking about the home inspection.  At this point you’ll need to make sure they give you permission for the inspection, that there is nothing on the disclosures that could be a sticking point, be fairly comfortable about actually buying the house (or at least the idea that if you don’t buy it that you could lose your $1000), know that you will have to be there to have utilities turned on and off and if it is in the fall, winter, early spring that you’ll have to pony up with $75 prepaid to have it rewinterized.  Hopefully this all works out.  Remember also that HUD homes are sold as-is, where-is.  HUD never does any repairs at all.  The buyer is getting a home inspection only to satisfy themselves that there is nothing that prevents them from buying the house.

Next step is to go through the process of obtaining your loan.  The buyer is already pre-approved by their lender (and HUD) right?  HUD oftentimes offers great incentives if someone is an owner/occupant and is going to use an FHA loan.  My last HUD property I negotiated, my buyer got a great deal and since the condo was in an area that it had been on the market a long time, they offered a deal that he only had to put down $100 (in comparison to the normal 3.5% for FHA loans).  Be careful of these incentives though because your individual lender may not be able finance this deal for the buyer.  I was lucky last time that they could find a proper program.

All is wheeling along now.  Wait! What about the appraisal?  How confident are you that the buyer will get their loan?  How confident are you that the home inspector is going to find something that knocks this transaction out?  Ask yourself these questions and then proceed.  Why do you say?  Well for appraisal purposes the utilities have to be turned on.  If you are confident that the inspector won’t find major issues AND that the buyer will definitely get the loan–you might gamble and schedule the appraisal during the time period of the home inspection.  If not, be aware that when it is time to do the appraisal that the utilities will need to be turned on again with a repeat of the sequence done during the home inspection (the realtor must be there with the buyer for the turn on, the appraisal, and then have them shut back off).

Let’s assume that all is well now and that the property appraised, the home inspection went well, and that the loan is moving towards closing.  All HUD home contracts are awarded a 45 day escrow period, meaning that from the time they accept and execute the purchase agreement and get it back to the buyer’s agent–there is 45 days to get the property closed.  In normal times, this was plenty of time to have for an escrow period.  Make sure your lender is dialed in and aware of this as the close date is really not stated in the PA but merely says it must be closed in “45 days”.  You need to give HUD written notice 10 days in advance if the lender cannot perform within those 45 days.  If you are the buyer, realize what kind of constraints your lender and realtor are operating under and work extra diligently in getting all relevant documentation to your lender as quickly as possible.  If the need arises to extend the closing you will have to file an extension with a detailed explanation of why it won’t close on time AND $375 in certified funds or cashier’s check made out to HUD’s closing agency.  This will extend the contract for 15 days.  Should you close earlier, the closing agency will refund you the amount in accordance to a $25 per day cost.  For example, you only need one day to close over and above the original period.  At closing, the buyer will be refunded $350 of the $375.

Also, be aware that just because your lender and buyer is ready to close–you are at the mercy of HUD’s closing agent.  The last HUD home I closed we were ready to close 10 days before we could get on the schedule for the closing agent.  We really squeaked by because HUD’s closing attorney could not do the closing until the absolute last day of our contract.  My buyer didn’t want to do a contract extension on principle as we were ready to close and they were not ready.  So although we got them a preliminary HUD closing settlement statement over a week in advance, we did not get the clear to close until two hours before it actually closed.  In hindsight, I should have encouraged the buyer to do a contract extension because Murphy and his darned law could have messed up the entire transaction if the closing agent had dragged their feet any.

The last items of note is that the buyer does a walk through prior to closing to make sure that nothing major has happened to the house (no trees have fallen on it, no fires have destroyed it, etc…).  You aren’t inspecting repairs because HUD does no repairs.  All HUD homes are keyed to the HUD locks.  You have to re-let the buyer in after closing so that they can change the locks out.  At that point though…..they have successfully bought a HUD home!

In closing, why go through the process?  Good question.  The entire system is set up for HUD’s ease, profit and comfort.  A buyer and his or her buyer’s agent must completely conform to the criteria that HUD has set up and follow these guidelines perfectly to successfully close on a HUD home.  Both parties need to take two or three hours and read all of the relevant online information that HUD has about HUD homes and their sales process.  The process is foreign to most Realtors and painful mostly.  Why go through the hassle?  Most of the time there isn’t that big of a discount to want to go through the process.  However, if the deal is good enough it is worth the effort.  My last sale was a condo that appraised at $108,000 and my buyer purchased it for $69,000 with HUD paying $2000 of his closing costs.  In addition, since it was on the market a while AND he was an owner/occupant, he qualified for an FHA program where he only had to put down $100!!!  Happy hunting and I hope this inside scoop is helpful regarding Middle Tennessee and Nashville foreclosures and HUD homes.