It seems like 10 or 15 times a month I get emails from people wanting to know more about the purchase of HUD homes. I have personally sold more than 20 HUD homes as an agent and have bought quite a few myself. Two of the HUD homes that I purchased last year for rehab have recently sold generating me a $35,000+ profit. This being said there must be some money making possibilities with these bad boys.

For newbies and seasoned investors alike, HUD homes are a great way to buy foreclosures because they are done in an auction style format with a specific time frame. Many of you lose out on great deals because you have to work during the day or have other obligations that aren’t conducive to looking at real estate. HUD homes work out great because bids are due by midnight on the day that the website lists. This will enable you to go through at your own leisure so long as your bid is put in by midnight on the day that the auction ends.

HUD homes are listed as either daily-all purchaser or owner occupant or daily owner occupant.

Daily all purchaser means that the home is open to all bids from both owner occupants and investors. New owner occupant homes come out every Friday and are listed as owner occupant for 10 days. Every Monday owner occupant homes from 2 Fridays ago turn into daily all purchasers if they have not sold yet. This means that the bids are due Monday by midnight. Many times owner occupant homes that make it past their Tuesday bidding time will end up going all the way to daily all purchasers. If you’re an investor who can’t look at homes on Monday be sure to go out over the weekend to check out the listings from the 1st Friday. One other way that properties end up going from owner occupant to investor is if the deal falls apart during the owner occupant period. Every Friday the entire HUD list is updated with new owner occupant homes, new daily all purchaser homes and price reductions on existing inventory. Homes with bids that are being considered will have read letters that say to check back after 4:00 to see if HUD decided to take the bid. Bottom line is the days to check HUD homes are Mondays and Fridays.

Locating HUD homes. There are alot of websites out there that would have you pay to get updated HUD listings but there is no need to pay for them the listings are FREE. I have put together a HUD finding tool on my blog (see my signature), just enter your state in the box over my picture and you will be transfered to the HUD website for your state. Note California Residents must choose Northern or Southern California. You can also find info at the HUD.gov website, I tried to take the work out of it for you though.

Agents if you are at the HUD locator please take note, I need agents to send the zipcode leads to.

Owner occupant means that the home can only be purchased by someone who intends on living in the home for at least a year. A word of caution the penalties for falsifying that you are an owner occupant when you are actually an investor can be fines not to exceed $250,000 and up to 2 years in prison. New owner occupant homes are listed every Friday and the bids do not have to be turned in until the following Tuesday. This 5 day window works out great because it allows so much time to go through the property before the actual bids are due. After the initial 5 day bidding period the bids are then changed to daily owner occupant. Daily owner occupant means that bids will be due each night by midnight until the property sells or turns to daily all purchasers.

Bidding on HUD homes can only be done by licensed realtors. You are required to have either a verification of cash funds or a preapproval letter in order to bid on a HUD home. Agents are required to have you fill out all of the paperwork and collect your earnest money prior to submitting your bid. Some agents do not require this, and they will submit your bid for you prior to filling out all the paperwork and collecting the earnest money. You will be required to give the agent either your Tax ID number or Social Security number, along with your name or business name, and address. The agent will also need your bid amount and the amount of closing costs that you would like HUD to pay. The agent will then enter all of your information into the agent section of the HUD website.

Bid results are posted the following day at 4:00. Daily all purchaser homes or daily owner occupant homes that come out on Friday have a bid due date of that Sunday at midnight. If bids are placed anytime over the weekend the results will be posted on that Monday at 4:00 unless you are bidding on a new owner occupant home in that case the bids would be due on Tuesday with the results coming out Wednesday at 4:00. Bid results is the place you can go to find out what the most recent homes have sold for.

Bid Statistics is where you can find out what all previous offers have been, and what was finally accepted. Bid statistics updates vary per state but many states update bid statistics every Friday. Bid statistics is a great place to do your research on what prices have been getting accepted in your area. Comparing accepted price versus the HUD asking price can give you a good idea of how low HUD is willing to drop their prices.


Closing a HUD home is just like closing on any other home. The major benefit to buying a HUD home is that they allow up to 60 days to close after all of the contracts have been signed. HUD does not take into account the amount of days that you will take to close when looking at your offer. Many times other homes for sale will take a 2 week closing contract over a 6 week to closing contract even though the 6 weeks to close offer might be for more money. HUD does not care how long it takes you to close so long as it is within the 60 day time frame. If you end up going past the 60 day closing period you can apply for an extension.

Wholesaling a HUD home can be a great way to make money when you have none. HUD homes work especially great for wholesaling because of the long closing period that HUD allows. The one problem that HUD homes can pose when wholesaling is the lack of ability to inspect (see inspection section). It will make it much easier to wholesale if the person you are selling to is willing to take the home in “as is” condition. Wholesaling HUD homes can be done as explained above (see wholesaling section), namely you would want to use a “back to back closing”. Also, having a cash buyer on a HUD wholesale will make things much easier if you are going to use the back to back closing. I typically buy using my line of credit, and then wholesale the property the following week or later that month depending on the type of buyer.


Closing Date Extensions are bought in 15 day increments for $15/day. This means that to get even a one day extension it will still cost you $225.00. The extension must be paid for with a cashiers check before closing. Many times HUD will waive the extension fee and credit it back to the buyer at closing if the buyer is an owner occupant. HUD is not so lenient on investors; normally they do not refund the extension fee for investors. When you submit your funds for the extensions you will be required to submit a letter stating why you are needing the extension. I have never had HUD try to verify the reason given on the letter. The typical letters that I write usually say something to the effect of “the buyer is having trouble obtaining financing because the previous lender lied about what they could do; but the buyer now has secured the proper financing”. If HUD does not grant you a closing extension then you would forfeit your earnest money.

Earnest Money on HUD homes is non-negotiable, if your are buying a home under $49,999 the earnest money is $500, if the home is anywhere over $50,000 then earnest money the earnest money is to be $1,000. If your realtor follows HUD guidelines then your earnest deposit check will be due prior to bidding when you submit your contract. Some realtors will wait to collect earnest money check until after you have won the bid. HUD guidelines also state that the money must be in certified funds. I have seen many realtors just take a regular check and HUD didn’t require them to change it. You will however be required to supply certified funds for your extension period if you pass your closing date.

Closing dates on HUD homes are 60 days from the day that the contract is signed by HUD. HUD does not take into account your closing date when looking at offers. There is actually not even a space for the closing date on the bid form that your realtor will use. When you sign your contracts their will be a space on the purchase agreement that states when you plan on closing the deal; HUD recommends just putting the maximum time which is 60 days.

Closing Costs that HUD is willing to cover have changed as of Oct 12, 2006. Here is a synopsis of the new HUD closing cost rules. HUD will now allow up to 3% of the purchase price to be included in the purchase price to go towards financing and closing costs. Costs covered within 3% include origination fees of up to 1%. On a 203k purchase HUD will only allow up to 1.5% of the purchase price to be financed in as costs.

I ran out of time but part 2 will cover financing, how to save thousands on every HUD you buy, and quite a few other tips for buying HUD homes.

Now that's a great post!!!

Lots of useful information for agents and potential investors alike!

I agree. Great post, ericmedem.

: )

Good info Eric.

I list and sell HUD homes so I get a lot of the same questions. Keep in mind that some minor things do change depending on the area of the country. For example, in Texas all new listings come out on Friday, all relists (including price reductions) come out on Wednesday.

A decent overview of the process and procedures can be found at:

http://www.firstpreston.com/documents/Guidebook_HUD1.pdf

Eric the 35k profit are you 1031 exchanging after holding for a year into another property or are you selling before the year is up and taking the 35 percent capita gains hit?If over the year of holding are you making 35k after paying the 15 percent capital gains if you are not exchanging.

I think it was a good post you had,I just wanted to point out that many new investors or people reading your article have no concept of 1031 exchanges,the timelines,or what capital gains taxes will be due and get in big trouble at the ned of the year when the irs comes after them for taxes owed.

A guy here in town who lists HUDs offers a class every so often... maybe once a year or less... He gets a great turnout.

super realtor,

I’m curious as to where you get the 35% number for short-term capital gains. I’ve seen other people post this same percentage as well. But according to my CPA, short-term capital gains are treated as ordinary income. Meaning that it would be taxed at whatever rate your AGI is taxed at.

Again, I’m just curious .
Thanks

Very informative Eric.

If you publish that through article distribution websites, I'm sure it would travel far and wide (giving your free exposure and links as it went).

I'd love to publish it in the HUD homes section of Home Buying Institute.

Thanks for sharing your expertise.

I thought the short term capital gain rate was 20% (as opposed to 15%), but I truely don't remember the short term rate for sure, and I don't feel like looking it up right now. You can have a short term capital gain that is taxed differently than ordinary income. You still have to show that your intent was to hold the property for investment and things just didn't go as planned. A lot of accountants won't even venture into those waters because proving intent is so vague. Definately check with your accoutant before you try anything like that. Let's say that you purchased a property and rented it out on a 2 year lease and the tennants broke the lease; then you had it listed for rent again and someone offered to buy it... a situation like that is something that might qualify. I'm not remotely qualified to give advise on this... know nothing about this sort of thing... Check with your accountant...

mcole,

You CPA is correct. Short term cap gains are taxed as regular income based on your tax bracket per the IRS wbsite.

Thank you Paul.

HUD deal can be profitable but all HUD homes are first offered to people who are going to live in them. When they don't sell they are opened up to all bidders (including investors). These are over priced (though HUD will accept a bid a(little 5-10%)lower than the list, or they need a lot of work. If you do rehabs these can be really good deals. However, over the last 2-3 years HUD has made a lot of money -top dollar- for many of these homes. All the brokers that are HUD registered look at them and try to sell them to buyers because HUD pays up to a 5% commission. this incentive causes some brokers to encourage buyers to bid more than they could get a similar house down the block for off the MLS (which only pays a 3% co-op) Look at them but do your homework and don't screw your buyer for an extra 2%. (by the way the broker gets to choose the commission but just can't go over 5%) Highest net to HUD wins the bid from an acceptable bidder.

"are you 1031 exchanging after holding for a year into another property"

section 1031 doesn't require that it be held for a year. it requires that it be held for investment and the exchange must be for 'like kind' property.

Yes that is true,but case law has shown a year to be a safe timeframe to keep the irs from challenging the 1031 exchange as that you were resaling it instead of holding it for investment purposes.

This doesn't come from me but a class taught from Starker services.

I guess if you are trying to cheat you really don't want the audit but you should pay more intention to the investment aspect (so long as you are not cheating). If you buy a rented (or shortly to be rented) property in January and find another one and exchange it in October, that is "like kind" the IRS can challenge but when they see that it is "like kind" they will accept it.

Also,1031 exchange intermediary companies also don't tell you that the IRS safe haven rules don't REQUIRE you to even use an exchange intermediary company. Whether or not that is wise, though, depends on your own circumstance and who you can trust to hold the money (that is not an excluded person or entity).