It may sound strange that a HUD home that’s offered below market value could actually hurt the buyer. Unfortunately, that’s the case. Let me explain …

Initially, HUD homes are listed at the value of the FHA appraisal that HUD orders before they put a house on the market. The listing agent may offer a price opinion (BPO) based on current market conditions and recent sales, but does not set the asking price.

Although appraisers should consider the same information, sometimes they are off. On rare occasions they come in way below the market value of a home for sale.

When that happens the house could become a true bargain and attract a lot of attention. We see it all the time. Real estate agents and buyers flock to these properties during the initial 10-day exclusive bidding period. Many submit offers and create a buying frenzy.

There are 2 major reasons why underpricing of HUD homes in Columbus may hurt prospective buyers.

Bidding Wars

The increased interest in a HUD house offered for less than its real value leads to bidding wars.  Buyers bid more than list price, when they submit an offer.

In many instances the contract price even goes beyond the market value of the property. That’s good for the seller (HUD), but bad for the buyer who wanted to find a deal.

Bidding wars have left many buyers in the dust, as they could not afford to compete with ever increasing offers.

Extra Cash at Closing

When you offer more than the appraised value on a HUD property, you create an unexpected problem for yourself.

If you overbid on a HUD home, FHA will base your loan amount on the existing FHA appraisal of the HUD home, not your purchase price. FHA will lend 96.5% of the as-is value  listed on the HUDhomestore. You have to bring the difference in cash to the closing. FHA does not allow a new appraisal.

All of a sudden your down payment has increased significantly.

An Underpriced HUD Condo

Here’s an example: the free standing HUD condo shown at the top of this article was priced at $65K, its FHA appraised value. Broker price opinions by various real estate agents came in around $75K.

This HUD home was substantially underpriced. The winning bidder offered $75K, $10K more than list price.

Once the contract was signed, the buyer discovered that FHA would only loan $62K on the house. The buyer had to come up with the difference.  That’s $10,000 more than they originally budgeted as a down payment.

What to do, if you Overbid?

You have 3 options, if you overbid on a HUD home:

1. Find a Different Lender. Any lender, except of FHA, will order a new appraisal, which will probably come in close to your purchase price. Dependent on the type of loan (VA, USDA) your down payment may be more or less than on an FHA loan. Be aware that you may run into issues with your new lender, if the HUD house is listed as insured with escrow and needs repairs.
2. Pay the Difference in Cash. If your purchase is really a good deal, it may be better for you to pay the difference in cash. FHA allows you to get money for the purchase from family members. Keeping the mortgage lower will also lower your monthly payments.
3. Get out of the Contract. This is my least favorite option, although it’s the one most buyers pick. You may get your earnest money back, if you can’t get financing. Your real estate agent has to work hard to help you get the refund.

Finding an underpriced HUD home may not be the winner you hoped for. However, if you are aware of the issues we discussed in this article, you can prepare your contingencies. And you may get a really good deal, after a few other buyers had to get out of the contract due to financing issues.

As the number of HUD homes, Fannie Mae, Freddie Mac and other bank-owned properties has dropped substantially since the beginning of the year, we are all wondering what happened to the so-called Shadow Inventory. That’s all of the foreclosed homes that are owned by banks or soon to be owned by banks that are not listed for sale.

In early 2011 it was rumored that the Shadow Inventory was huge and that it will tear the real estate market to pieces.

2011 is over and the real estate market is improving. REOs and foreclosed homes did not flood the market as predicted. According to a recent report by CoreLogic there’s only one foreclosed home in the “shadows” for each home that’s currently listed.

It appears that the Shadow Inventory does not affect the Columbus market. Many HUD and bank-owned homes sell for asking price or above. The market is not flooded with foreclosed homes and the total number of HUD homes for sale has dropped significantly.

Columbus Real Estate Stats

Let me share a few data to show that the Columbus real estate market is very active and alive, as we enter the new year. Below you can see the current number of government-owned, foreclosed homes in Central Ohio.

HUD Homes: 71
Fannie Mae: 233
Freddie Mac: 105

Here are more indicators of a vibrant real estate market:

The inventory of homes for sale on the Columbus MLS dropped by 27.5%  from 17,471 to 12,675 (within one year – Nov 2010 to Nov 2011).
Pending contracts increased by 37.4% from 1,341 to 1,843.

If the shadow inventory does not show up soon, we are actually heading in a sellers market.

A couple of years ago HUD made the results of all their online auctions public. You could simply go to their website and see how much other buyers were offering on HUD homes in Columbus and throughout the country. You could even see bids declined by HUD and who submitted them. That all went away when the HUDHomeStore.com webportal went online in 2010.

In their latest update to the HUDHomeStore.com bid results are once again available to the public. At least for a limited time and with some limited information.

Now you can see the actual purchase price HUD accepted on a property.

As bidding stats have not been published for almost 2 years, this is a welcome change to HUD’s website. Bid results of HUD homes are very useful when you develop your bidding strategy. Bid results help you determine which discounts are acceptable to HUD and how much you should offer to get a purchase contract accepted.

You can find the Bid Results Tab is in the upper right corner of the HUDHomeStore,  just beside the FAQ tab. It lets you search recently accepted bids, by case number, state, county, city, zip, and street.

What kind of information can you find?

Most importantly, you will see the Net to HUD. That’s the amount HUD gets out of the deal and does not include realtor commissions and closing costs. You do not see the purchase price and whether a real estate agent reduced their commission.

You will also see, whether an owner occupant (O/O) or an investor (INV) purchased the HUD home, as well as the bid date, the open date and the date, when the offer was accepted.

Finally, it shows the name of the brokerage representing the buyer.

The Bid Results are only displayed for 2 weeks. You have to be quick, if you want to see how much homes are selling for.

Bid Results of Marysville HUD Home

The image above shows the bid results of a Marysville HUD house that was offered at a huge discount as compared to the retail values of other homes in the area. This house needed a lot of repairs, including mold remediation.

It was listed for only $68,000, while similar homes sold for twice as much. Needless to say, this listing generated immediate buzz which resulted in more than 30 showings in the first week.

As you can see from the bid results, this HUD house went in contract for $83,660 Net to HUD. The actual purchase price could have been as high as $92,000, if we figure in 6% commission to agents and approximately 3% in closing costs.

Do you need help with the Bid Results form?

Not sure what to offer on a HUD home?

Fill in the form to the right and an experienced, HUD certified, Columbus real estate agent will get back to you within 24 hours.

In half of the US you can buy HUD homes with only $100 down. Unfortunately, Ohio is in the other half.

HUD just reinstated the $100 down program in 2 of their 4 national regions. It appears that they picked the ones with the largest inventory of homes.

HUD homes sold really well in Ohio during the past 12 months. Our inventory is very low. The number of HUD listings decreased from more than 400 HUD homes at the beginning of the year to around 100.

The $100 down program is one of the best incentives for owner occupant buyers. Instead of the regular 3.5% down payment, you only need to bring $100 down on FHA loans. In addition, HUD contributes up to 3% toward your closing costs.

I believe that we won’t see the $100 down program in Ohio anytime soon. We probably don’t need it to sell these homes, anyway.

However, if Columbus home sales continue to dip in November and December (as they usually do), HUD may reconsider and offer this great incentive to help buyers get into a HUD house with only $100.

There are 2 other incentives that make HUD homes more attractive than other foreclosed properties, even without the $100 down payment program:

• HUD houses are offered with repair escrows when you finance with an FHA loan. You don’t have to get a rehab loan to cover minor repairs of less than $5,000. This will save you time, as regular FHA loans tend to close much faster than 203k rehab loans.
• HUD homes are appraised for FHA financing. This means that you don’t have to pay for a separate appraisal. This will save you $300 to $400 and cut the time for loan approval by at least a week or two.

There’s a common misconception among home buyers when it comes to purchase contracts on HUD homes. Many people believe you can’t cancel a HUD contract, no matter what.

That is not the case!

HUD Homes Contract Contingencies

Actually, there are 2 contingencies in any HUD purchase agreement that allow prospective buyers to get out of the contract: a financing contingency and an inspection contingency.

Some buyers and real estate agents shy away from submitting offers on HUD homes, because they are sold “as-is”. This means that the Seller (HUD) will not perform any repairs.

Private real estate purchases are often contingent on certain repairs.  A buyer may ask the seller to replace the carpets or install a new furnace.

That’s not possible with HUD homes. The government won’t make any repairs. You buy a HUD house in the condition it is in at the day of closing. Even if the house was burglarized the day before closing, HUD won’t remedy it.

However, you have the right and you are strongly encouraged to perform your own inspections after your contract has been accepted. All HUD contracts grant you a 15 day inspection contingency. If your home inspector finds a condition that is unsatisfactory, you can cancel the contract and get your earnest money back.

The contingency only applies to owner occupant buyers. Investors are out of luck. They will loose their earnest money, if they cancel the contract and don’t close.

Where can you find the exact wording of these contingencies?

Any HUD house listed on the HUDHomeStore comes with a stack of documents (PDF files) you can download, even before you make an offer. Go to a property of your choice and click on the Addendums tab. There you will find a Contract Package, as well as other addendums you should read. The Addendums are different for each asset manager.

Here’s a sample contract package for HomeTelos. Go to page 10 and read the Purchaser’s Rights and Responsibilities. It explains the 15 Day Contract Cancellation Contingency for property inspections.

An other section deals with the Forfeiture of Earnest Money Policy. It explains how the financing contingency works. You can read it on page 12. There are 6 circumstances under which an owner occupant buyer will get a 100% refund of their earnest money – one of them is financing.

You are required to sign these documents when you submit an offer. Your Columbus real estate agent is required to specifically alert you to these contingencies.

Make sure you work with an agent that really understands HUD homes and will help you get your earnest money back, if you need to get out of a HUD contract.

These two must be the most affordable HUD homes in Columbus. They are cheap. Each is listed for less than $10,000. A smart investor will be able to make a lot of money on these Columbus houses.

2414 Parkwood, Cols, 43211               141 S. Ogden Ave, Cols, 43204

HUD-owned houses like these are mostly purchased by savvy investors, who know that there is gold behind the surface.  The government is a very motivated seller and will do whatever it takes to get rid of these homes. In the worst case they will end up as $1 HUD homes offered to the City or a non-profit community organization.

Make Money as a Landlord

As I did not see the inside, I can’t say how much work they need. However, based on my experience as a real estate investor and landlord, I would estimate that it takes between $15K and $20K to make them Section 8 compliant and rentable.

After proper rehab, these HUD homes should rent for at least $600 a piece, probably more. If an investor puts a total of $25,000 into a house and rents it for $600 per month, the total annual income would be $7,200 – a 29% return on the total investment. Of course, you have to consider property taxes, insurance and vacancy expenses.

Now this deal does not look that bad, but it’s not for everyone.

It will take an investor that has the cash or access to rehab money, and wants to take on this challenge. But there is a good chance that the investment will be recovered in 4 years. Then you own a free and clear house, and your rental cash flow is pure profit.

Interesting Facts about these HUD Listings

141 Ogden is listed with a minimum commission of $1,250 each to buyers and sellers agents. This means that after closing costs and commissioins there won’t be much left for HUD.

2414 Parkwood does not have a minimum commission. Now imagine how hard a real estate agent will work for 3% of $3,000? Yes, that’s just $90. It won’t even pay for the gas to show the house.

When you look at the sales history of these 2 HUD homes, you can estimate the approximate amount of the FHA loan that was originally used to purchase these houses. 2414 Parkwood sold in 1996 for $23,800 and the auditor has it valued at $25,300. 141 Ogden’s last owner paid $43,714 in 1995 and now it’s valued at $29,600 by the auditor.

You won’t find too many HUD homes in Columbus that are available to investors. You need a good strategy to be successful when you compete for the limited number of HUD listings.

Last week one of my investors won a bid on a HUD home that was in fairly good condition, offered at a reasonable price, and did not get offers from other buyers. After submitting a few bids and some back-and-forth with HUD, my buyer won the bid at less than 80% of the list price.

A 20% discount is certainly not the best you can get.

The discount will depend on the original asking price and how that compares to the market values of similar homes in the area. Quite often we see HUD houses offered at a relatively low price, especially, if they are uninsured and cannot be purchased with regular FHA loans. So, you may not need a huge discount from the asking price to make it a good deal.

Here are 3 bidding strategies that will help you get your offers accepted quickly:

1. Make Cash Offers on Uninsured HUD Homes

Most HUD homes available to all bidders are uninsured. This means that they need more than $5,000 in work – or more than 35% of the purchase price. When it comes to cheap homes, 35% is not that much, and you may be able to buy a good quality house at a bargain price.

HUD can’t sell these homes with FHA loans. They know that only a few buyers will go through the hassle of applying for a 203k rehab loan. Therefore, cash offers are best. If you don’t have cash, work with a hard money or rehab lender that can give you a pre-approval letter and close quickly.

2. Respond to HUD’s Counter Offers

In many cases HUD will respond with a counter offer. We suggest that you submit a reasonable, but low offer first – say 65% of asking price. If there are no other bidders, HUD will counter with a number they will accept.

The counter offer HUD sends out is the NET amount they will accept, so you have to add the commissions to the net to get the total contract amount. The buyer’s agent may reduce their commission, if that is necessary to make a deal work.

You do not have to accept HUD’s counter offer. You can submit a lower bid. As these homes are on a daily bidding deadline, you can submit a new offer every day. If there are no other bidders, there’s a good chance HUD will accept a lower offer or continue to counter.

Once other bidders get into the game and offer more than HUD’s counter, you may be out of luck. All bidders get the same counter from HUD.

3. Be Patient and Ready

There are not too many HUD homes for investors. But great deals appear on the market every single month. There is no logic, why some homes are offered at a bargain price and others are overpriced. You just have to watch what’s happening on the HUD home store. An experienced Columbus real estate agent will gladly do it for you.

You have to be ready and pull the trigger when the right deal comes around. Over the past year we had almost new condos offered for less than half of their retail value, we saw a duplex in German Village sell for the price of one of the units, and we found rent ready HUD homes listed for only $11K.

Bonus Tip for HUD Investors

HUD is more likely to accept lower offers on homes that fell out of contract before. Sometimes the relisting of a HUD Home triggers a price reduction as well as a change from insured with escrow to uninsured.

These are the deals where you get the lowest offers accepted.

Always keep in mind that HUD is a motivated seller. They make mistakes occasionally that you can profit from. But they do not give their properties away just to get rid of them.

HUD just released a new mapping tool. It displays all homes for sale by Fannie Mae, Freddie Mac and HUD on a Google Map. Now you can find all government owned houses for sale on a single website.

The so-called REO Portal was developed for “neighborhood stabilizers” to help them find properties from all 3 agencies in a consolidated map.

The good news is, that the portal is open to the public, not just to government agencies and non-profits who are supposed to buy and rehab properties in depressed areas.

The mapping tool is pretty easy to use.

When you opent the HUD Portal Website it displays a map of the United States. You can enter a street address, a city and state, or select your state and county from a pull-down menu to get to the area you are interested in. The map zooms to the city or county you selected. You can see property markers that indicate the locations of homes for sale once you hit Zoom Level 11 or larger.

The icons for the 3 organizations are shown as:

• FHA – HUD homes
• FRE – Freddie Mac homes
• FNM – Fannie Mae homes

When you click on one of these icons, a pop-up will appear. Sometimes the pop-up shows in the left upper corner of the web page, so you may have to scroll all the way to the top of the page to see it. Dependent on the type of property you will see information about the property, such as, list price, address, agent information and a link to the listing.

On Fannie Mae listings the link goes directly to the individual listing page on Homepath, Freddie Mac listings end up at the general Homesteps page, and HUD listings link directly to the listing page at the HUDHomeStore.

Although the instructions say that you need to register to use the system, it works fine without logging in.

A sign-up is necessary, if you want to create projects. Registration is easy and immediate. It requires a valid email as the username, your name and a password. There’s no confirmation. You can log in right away.

Once logged in, you can draw outlines of areas of interest and save them as “projects”. They will email you a list of properties inside the project area in a spreadsheet, as well as statistical information about the area.

The REO Portal is a nice tool that helps home buyers find government owned real estate easier. Unfortunately, it still lacks the functionality a buyer would expect when searching for a home, such as number of bedrooms and bathrooms, the price range, and square footage you are looking for. Currently, there is no functionality like that available.

Remember the house on Westfall Road in Lancaster that we featured a couple of weeks ago?

It was listed for $72K, way below market value. With retail values of similar homes in the $160K range, it seemed that HUD forgot to add a “1″ in front of the purchase price.

This is a huge, 3,000 sqft, new house with hardwood floors, stainless steel appliances, a large attached garage and a pole barn in the yard. It sits on a 2 acre lot, just a few minutes from the amenities of a large city!

As expected, the low asking price generated a lot of interest in this home. There were more than 40 showings during the initial 10 exclusive period. By the deadline, HUD had 30 offers on the house.

Now this home is in contract.

The winning bid was $115K, that’s 50% higher than its list price.

What can you learn from this Bidding War?

If you are a seller and list your house below its market value, you will generate a lot of interest. This is true in any market, even in today’s economy. It is especially true, if the house is in good condition.

You will receive more offers! And as the seller you can pick the one that’s best for you.

Keep in mind that there’s a buyer for every home – if it’s priced right.

One more trick that’s been used by many REO brokers (but not by HUD): if they receive more than one offer, they call all bidders and ask for a best and final offer. Usually, they will squeeze out another couple thousand bucks for the seller.

If you are a buyer, don’t despair! Despite all the activity, the 30 offers, and the overwhelming competition, the winning bidder still got the house for almost 30% below market value. That’s $45,000  in immediate equity!

What a great deal!

The asset managers for large REO portfolios know that real estate agents are essential to selling their inventory. As many bank-owned properties sell at dirt cheap prices, realtors don’t have a lot of incentive to promote these Columbus houses for a standard 3% commission.

It has been common practice for sellers of low-end properties to offer a fixed commission of around $1,000 or $1,500 to both the buyer and listing agents, in order to keep them motivated.

Over the past few weeks HUD has quietly changed its commission structure. On some properties HUD no longer offers a minimum commission.

This may have an impact on you as a buyer, too.

Over the past couple of years HUD’s minimum commission was $1,250. It applied to HUD houses that sold for less than $42,000.

With many homes selling for $10,000 or less, it will be harder for agents to make money on HUD home transactions. They may get paid $300 or less for that sale and still have to split it with their broker.

How many hours can you spend for $150? It usually takes at least half an hour for the agent to drive to a house for a showing, spend another half hour in the house and then go back. That’s already 1.5 hours, not considering the gas.

The agent also must submit the contract, collect the earnest money deposit and mail in the original documents, schedule inspections, utility activations, coordinate with title agencies, call home owner associations, and attend the closing.

You better be very efficient to make money with cheap properties.

We already saw the fall-out!

A few buyers have called and told us that their realtors refuse to show HUD homes or submit an offer for them, because they can’t make enough money. I understand. It’s their business. If you can’t make money, then you can’t do the deal.

Most likely more buyer’s agents will steer clear of HUD homes and focus on other types of REOs to earn a minimum commission. Buyers will have to call the listing agents directly to purchase HUD houses.

To find HUD homes that come with minimum commission, go to the HUDhomestore and look at the Status column. If you see the symbol on the left “the listing and selling brokers are eligible to receive a commission of $1,250 for the sale of this property.”