HUD Homes
are the root canals of real estate.
Thank
goodness they are on the decline. I have
probably sold 20 HUDs during the downturn, and I have one under contract now
that is reminding me why I need to quickly make a U-turn and head the other way
anytime I see a HUD sign planted in front of a vacant property.
A HUD home
is a property owned by the Department of Housing and Urban Development. This is the government agency that insures
FHA loans, meaning that if banks will underwrite loans to guidelines
established by FHA, the government will step in and make the lender “whole” if
the buyer goes into foreclosure.
This means
minimal risk to the banks, which meant that a whole bunch of FHA loans were
done during the downturn that never would have been approved if there wasn’t
the government’s “guarantee” of buyer performance.
So when a
bank forecloses on an FHA buyer and submits and insurance claim to HUD, the
government pays off the bank and takes the house in trade.
This is
where the fun begins.
I know my
candor in this post will be upsetting to some people, but the first thing you
need to know is that HUD does not hire based on merit.
So when HUD
sends in an “Asset Preservation Company” to drain the plumbing lines and secure
the property, there’s no guarantee that this is being done correctly. (And yes, just yesterday, I did an inspection
on a HUD home where the contractor brought in to winterize the property failed
to do so properly, resulting in a series of frozen pipes that caused a series
of mini-floods throughout the house when the water was turned on… ah, but
that’s a story for another day).
Once the
property is “winterized”, HUD then puts it on the market.
Here’s an
overview of the rules:
- Home is
placed on the market for 10 days;
- “Bids” are
submitted online on behalf of owner-occupant buyers, but they must be working
with a “HUD-certified” broker (which, fortunately or unfortunately, I am);
- Investors
are not allowed to bid during this initial first-look period;
- Homes are
sold strictly “AS IS”, with no repairs made by HUD, ever.
- High bidder
wins, regardless of qualifications
If you’re
lucky enough to win a HUD bid, now things get really exciting.
If you’re
the broker, you have 48 hours to get a fully-executed contract package to HUD’s
field office in Texas. If the package
doesn’t show up in 48 hours, delivered by overnight mail, your bid is tossed
aside and they go to the next highest bidder.
What’s in
that contract package? Page after page
of eight-point font legalese, which must be filled out in BLUE ink (no
exceptions), with each and every signature and initial space fully executed (or
see paragraph above).
HUD also
views its transactions as so important that they require the signature of the
owner of the real estate broker’s company.
So yes, the owner of my company is expected to sign a document (in BLUE
ink) verifying that he knows this transaction is happening and that he
personally vouches for the fact my client is an owner-occupant (although of
course he has no idea who my owner-occupant buyer is).
It’s up to
me to track down the owner of my company and get his signature (no matter where
on the planet he may be), after I have presented the 49 pages of contract
paperwork and addenda (signed in BLUE ink) to my buyer and picked up his
cashier’s check for $1,000 (HUD’s standard earnest money deposit).
I then need
to rush this package overnight (at my expense) to Texas, where it generally
sits on someone’s desk for two or three days until it is opened and reviewed. Eventually I get an email including a copy
package of the contract, signed by an authorized desk jockey at HUD.
At this
point, you have 15 days to get an inspection done. If flaws are discovered with the home that
were not disclosed by HUD (which is a pretty sure bet), you can cancel. But your 15 day time limit is fixed and there
are no extensions granted for any reason.
So the first
thing you’ll want to do for your inspections is to get the water and utilities
turned on.
But… not so
fast. HUD wants a $150 cashiers’ check
before they will fill out and sign a “Utility Activation Form”, which most
water districts and utility companies require before temporarily restoring
service to the house.
Once you
have purchased this form (by sending another overnight package at the broker’s
expense), you can call the water company and the gas/electric company.
Most water
companies will not leave the water on for more than 72 hours, and they require
that someone be at the property when the water is turned on at the street (to
ensure the house doesn’t flood when the water is turned on). Of course, they give you a nice four hour
window with no advance notice, so plan on spending half a day at the house
waiting for the water guy.
Working with
the utility company can be even more fun.
Xcel will give you a day’s notice when they are coming to turn the gas
on, but that’s it. If you’re not there,
no heat for you.
So plan on
spending up to a full day waiting for the gas service to be restored.
Once you’ve
got water and power turned on, now you have a small window of time to get your
inspection done. This will be another
$350 to $400, and as much as $500 if your client wants to test for radon.
If your
buyer is financing the property, chances are the appraiser will need to be
squeezed in during this tight little window as well so he or she can verify
that you have hot and cold running water.
Plan on writing another check for $400 for the appraisal.
Let’s say,
however, that the appraiser doesn’t show up during your 72 hour window of time
with the utilities on.
No problem,
we just get another cashier’s check for $150 to HUD, get another Utility
Activation Form, and we start the process over.
Spend a half
day waiting on the water. Spend a full
day waiting for the utilities. And then
hope that the appraiser shows up during your window of water/power time.
Let’s
backtrack to yesterday for a moment.
Say, hypothetically, the Asset Preservation Company (Lowest Bidder Asset
Preservation Company, LLC) botched the winterization and your plumbing is
damaged.
Let’s say
your buyer spends $400 on inspections to learn that the plumbing is
broken.
That’s okay,
you still might have 24 hours to get a plumber out (hypothetically), fix the
plumbing (at the buyer’s expense) and get the home inspector back out to finish
the inspection (with an additional trip charge).
Even if that
happens, though, we’ve run out of time for the appraiser before the utilities
are turned off again.
Ok,
freeze. Go get another cashier’s
check. Send it to HUD. Wait four days. Get another Utility Activation Form. Call for water and power. Sit in the house for a day. Get the appraiser out. Hopefully no one has broken in and stolen the
appliances or the copper pipes during this time. Finally the appraiser signs off.
Now the
lender can underwrite the file and (hopefully) approve the loan.
If all of
that happens, you’re almost there.
Except now
HUD requires that all closing figures and documents be sent to the title
company eight full business days before closing. No, I am not making that up.
So your
lender busts his or her tail, gets everything to the title company, and you
wait. And wait. And wait.
Finally, HUD
looks at the paperwork and signs off.
You’re set to close!
You bring
your funds to closing. You sign you
paperwork. You finally own a HUD house!
You ask for
the keys. Um, you ask for the keys. Keys?
Oh yeah, HUD
doesn’t allow me to give you the keys.
Per HUD’s policies and procedures, since the same key opens all 4,000
HUD homes in Colorado (that is some brilliance, right there), I am not allowed
to give it to you.
Instead, I
am supposed to drive you to the house, open the front door, and wish you the
best. Then I am supposed to mail the key
back to the listing agent. Again, I am
not making this up.
By this
point, I think you can see the thread of insanity that runs through this
process.
It is my
belief that at least half of the brokers in Colorado won’t even mess with HUD
homes because of the absurdity of the process.
But, because HUD generally gives homes away for cheap (after all, the
taxpayer foots the bill for losses), buyers go after them.
The thing I
want to do with this post is to use this as an educational tool for future
buyers. You need to know what this looks
like up front, because by the time you figure out you’re in the middle of a three
ring bureaucratic circus, you’ve already invested significant time, money and emotional
energy.
I’m fine
with HUD homes. They are what they
are. They are often sold well below
market value. But if you find the
process stressful, confusing and fraught with upfront costs and mind-numbing
sideshows, don’t blame me. You’ve been
warned.
