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Investing in HUD Homes? What Are Details that I Should Know
Hello everyone. I was talking with a real estate agent who said that he would be willing to assist me in buying real estate. In his email, he suggested looking into HUD homes. Now as a wholesaler, I have never dipped into the realm of HUD foreclosures and only know a little about investing in those properties. Not too long ago I started reading about the HUD investing strategy, but I do not yet feel confident in my knowledge to start going down that path.
I do not have a great source of funds, but I did think about the possibility using my buyers' funds to purchase the homes and then assign the deed to the buyers that lended the money. If I remember correctly, this may be what is considered a double closing. Since the contracts of HUD homes cannot be assigned by traditional wholesale methods, I think DCs would be the best route to go.
For people that know more about this subject or have invested in HUD homes, is there anything that I should know that will help me do well in this niche? I have been looking into focusing on a new way to make profits in real estate and it seems like HUD home investing could show some satisfactory results. Any advice that can be given is very appreciated. Thank you!
Very simple using the HUD site to find properties and make your offers here:
http://www.hudhomestore.com/Home/Index.aspx
Thank you Ed. In terms of the condition of these homes, I heard that they require minimal repairs since they are taken good care of while they are up for sale. Does this mean that I should have a contractor estimate repair costs anyway, or should I trust the estimate provided by the HUD agents?
I would also check your RE laws in MD. Sounds like you might be close to an ethics violation. So, you'd be getting paid the commission and an assignment fee? The LLR might have something to say about that. Adding an additional fee in there (your assignment fee) would necessitate a bigger spread on the deal, which would compromise your buyer's position and offer. Just CYA for sure.
As for HUD homes, there is no inspection period contingency for investors, so if the numbers are close, I always go out and see the condition for myself. Not all HUD homes are move in ready. In fact, in my area, most are not. Also, the escrowed amount for repairs is nice, but on a cash deal, that goes away, so remember to negotiate a lower offer in a cash deal when repair escrows are offered.
Even then, when your bid is accepted in an O/O deal, you (the buyer, more specifically) is responsible for all costs to dewinterize/rewinterize, and turn on utilities for inspections. That could end up costing a significant amount up front and out of pocket before closing.
Good luck.
Keep in mind these houses have all been on MLS so they're not a secret to those you may try to market them to. If you put down your EMD and don't close you will lose it and there is no inspection contingency.
HUD homes are in various states of repair from very good to very bad. You should always have your own estimates of value.
@Jacqueline Mims Actually, I would not ask for an assignment fee on top of commission. After agreeing on a purchase price, I would simply add a commission fee to the price of the house and the buyer would provide the funds (purchase price + commission fee) to buy the property. Then I would close with the buyer directly after purchasing the property without asking for any additional fees.
Originally posted by @Amir Stoudamire:
Thank you Ed. In terms of the condition of these homes, I heard that they require minimal repairs since they are taken good care of while they are up for sale. Does this mean that I should have a contractor estimate repair costs anyway, or should I trust the estimate provided by the HUD agents?
HAHAHAHA I am a HUD inspector and I can tell you that they need work. Hud does not "fix" much at all. They just make it safe and secure.
For example if the roof leaks all we call out for is a tarp to be placed on the roof. If there is a hole in the floor all we ask for them to do is cover the hole.
If there is a broken window all we ask for is that the window is boarded up. Windows and doors do not get fixed or replaced, they get boarded up to secure the property.
If there is any damage to the pipes all we ask for them to do is cap the lines so it won't leak if the water is turned on.
Just imagine how many HUD keys are out there. You can buy them online
@Scott K. Hi, I am a HUD listing broker. You can buy HUD keys online, but they do change them occasionally and use different keys than they used to. In my experience HUD will replace doors and windows in some cases. In fact I have not seen a boarded up window on a hud in my area for quite some time. In had one house that had windows broken out three times and HUD fixed them each time.
As at as plumbing and other repairs they almost never fix those.
Amir, if you are taking a commission as an unlicensed wholesaler that is illegal in just about every state.
WOW that would never happen in the Detroit area. If they did they would need to print some more money to cover all those cost.
That surprises me that HUD would do that. Maybe in better areas.
When HUD comes here to do inspections for QC they don't even go into the city of Detroit
@Mark Ferguson I am a little confused. I thought there was no license required to buy homes as a real estate investor. I know real estate agents need to be licensed in order to operate, but I was lead to believe that there was no licensing required to purchase properties as an investment.
Originally posted by @Amir Stoudamire:
@Mark Ferguson I am a little confused. I thought there was no license required to buy homes as a real estate investor. I know real estate agents need to be licensed in order to operate, but I was lead to believe that there was no licensing required to purchase properties as an investment.
Anyone can buy a house, but only a licensed real estate agent/broker can charge someone a commission in a real estate transaction. You stated previously that you'd be charging a "commission," which would be practicing real estate without a license....a felony.
@Amir Stoudamire maybe you used the word commission out of context. You can buy and sell all you want and take the profit. You can't help others buy and sell and take a commission without a license.
@Mark Ferguson I believe you are right. Wholesale fee may be a better term. Since I do not have the money myself, I would be using my buyers' funds to purchase and then charging a wholesale fee on top of the purchase price based on what is agreed upon. So basically, if I were to buy a house priced at $200,000, then I would ask for $210,000 with the extra $10,000 to be a wholesale fee. Then after I close with the seller and then the buyer soon after, he or she could make repairs needed to raise its value and resell at a higher price. I believe this is what is called a double close.
Is this still considered wholesaling on my end?
To get a HUD deal:
1. Inspect the property because as @Mark Ferguson and @Scott K. said, HUD properties can need repairs. Do not believe what some people say that HUD houses do NOT need as much repairs. We inspected a HUD house where the foundation has a DAMAGE - buckling - a $20K fix. Good thing we did our inspection because if NOT, we'll be in the RED.
2. Once you inspect the property, MAKE the offer. Now, if you plan to resell this house wholesale, you need to factor in your profit as well as the profit of your buyer. You have to leave a lot of money on the table for your buyer.
Here's a HUD deal which we recently got:
House is worth $120K, repairs: $20K, we got it from HUD for $44K and we sold it quickly to our buyer for $55K. We are leaving so much room in the deal for our buyer to make a TON of money.
3. Once you have the HUD accepts your offer...you have 48 hours to send in the paperwork AND the earnest money deposit. If not, you will lose the deal.
4. HUD typically does not pay for title work (at least this is true for Illinois - check with your HUD certified agent in your state), so you have to pay for that or for your buyer.
5. HUD does NOT allow you to assign your contract - so you need to buy it using your cash or transactional funding before you can re-sell it to your buyer.
6. As mentioned here - HUD listed properties are also in the MLS so...you have to buy them WAY BELOW what they're listed on the MLS or else you cannot wholesale them. For example, the deal I described above, HUD has it listed for $67,100 (so we sold it $12K below what they could have bought it from the MLS)
7. One can submit offers to HUD through HUD-certified agents only and they submit the offers using their NAID number and real estate license number through hudhomestore.com
Originally posted by @Mark Ferguson:
@Scott K. Hi, I am a HUD listing broker. You can buy HUD keys online, but they do change them occasionally and use different keys than they used to. In my experience HUD will replace doors and windows in some cases. In fact I have not seen a boarded up window on a hud in my area for quite some time. In had one house that had windows broken out three times and HUD fixed them each time.
As at as plumbing and other repairs they almost never fix those.
Amir, if you are taking a commission as an unlicensed wholesaler that is illegal in just about every state.
Detroit must be different. I have been doing this for 2 years and we have not changed keys since I have been doing this.
Maybe they know the Detroit area is a lost cause. All our homes in the city are empty of the mechanicals and copper. The kitchen is gone in most of these homes.
@Scott K. It has been a while since they changed them. They were supposed to change them every six months, but aren't. They changed keys about three years ago and used four keys. Six months later they switched to two new keys and they haven't changed them again.