Met with a first-time buyer last week who was excited about purchasing a HUD home. "The lender at my credit union said I could buy a HUD home for $100 down," she said, breathlessly. "That's what I want!"
At that, my eyes rolled back into my skull and my forehead crashed down on the table.
What is a HUD home?
HUD homes are homes that have been taken back by the US Department of Housing and Urban Development (HUD) when FHA loans go bad.
Simply speaking, HUD homes are foreclosed properties that had FHA financing attached to them.
Simply speaking, HUD homes are foreclosed properties that had FHA financing attached to them.
HUD does have a program where buyers can purchase a HUD home for $100 down... in theory. The language in the HUD guidebook says that HUD will allow buyers using FHA financing to purchase a HUD home for $100 down, if they make a full price offer. Sounds good, right?
Now here's the catch:
"If your purchaser is obtaining FHA financing, and you overbid the appraised value (HUD's list price), the purchaser must pay the overbid amount in cash at closing."
Did you catch that?
HUD is notorious for lowball appraisals, and they universally slap lowball prices based on lowball HUD appraisals on almost all of their listings.
Case in point... last week, I submitted an offer for another first-time buyer on a HUD home in Northglenn listed at $130,000. Comps in the area ranged from the $150k's up to $193k, and this appeared to that rare HUD home that was essentially move-in ready.
My FHA buyer bid $135,100, although I would have been comfortable going a little higher. (HUD basically facilitates a 10 day "blind bidding" process for its listings over the Internet, where certified agents can log in and place sealed bids for their clients. On the 11th day, HUD reviews the bids and selects a winner.)
So who won? In the end, there were 47 bids placed on this undervalued home with the top bidder offering $151,900. If that buyer chooses to use FHA financing, he will need to bring in $22,000, plus closing costs. That ain't $100, folks.In the name of disclosure, I have pulled off the $100 HUD down payment before, but it's not easy. And if the home is in decent shape and priced below $200,000, you are looking at 10 to 50 bids right now, on average. At least until the tax credits go away at the end of April.
I have talked to many people at the HUD office over the past few years, and one of their great frustrations is with agents who submit bids on HUD homes thinking their clients can buy them for $100 down. Then they bid $15,000 over list price, the offer gets accepted, and the buyer gets blindsided when he's told he needs to bring in $15,100, plus closing costs.
A week later, the home is back on the market and the buyer is looking for a new agent.
I'm not saying that HUD homes are bad, and I'm not saying the process is unfair. But I am saying that you need to be educated about what's happening in the market so that you can make wiser choices.
My client knew he was going to have to bring money to the table to purchase that HUD home, had he been high bidder. I wonder how many of the other 46 bidders thought they were going to move into this home for $100 down?
