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.

We just received this new announcement from HUD: Buyers who want to purchase an Ohio HUD home using the $100 down FHA program may now bid ABOVE the HUD as-is appraised value and get a second appraisal to justify the higher value.  Initially, HUD insisted on lenders using their existing appraisal. This created problems for buyers who offered more than the HUD appraisal, as they had to pay the difference to the contract amount in cash.

Here is the news release from HUD:

UPDATE OHIO $100 DOWN PAYMENT INCENTIVE PROGRAM FOR FHA FINANCING 

8/20/09: The $100 down payment financing is available on most properties through FHA approved lenders. Please note that the $100 down offer applies if the purchase price is over $25,000 and is less than or equal to the appraised value of the property. If the purchase price is greater than the appraised value, the purchaser may obtain a new FHA appraisal to support the higher mortgage amount or must pay cash in the amount of the difference between the appraisal and the purchase price less $100. For a copy of the flyer please click here . Buyer is responsible to secure an approved lender who will accept a new appraisal. 

Please Note: Not all lenders offer the $100 down FHA program, and not all lenders will allow you to order a second appraisal. BEFORE you submit a bid above HUD’s as-is value, you should confirm with your preferred lender, that they will order a new appraisal!

I am working with a HUD approved lender who will offer both, the $100 down FHA program and the second appraisal. Call me for details!

Thanks for reading our Columbus HUD Homes Blog
Posted by: Susanne Novak, ABR, FIS, GRI 
Columbus Realtors specializing in
HUD Homes, Shortsales, Investment Real Estate
(614) 975-9650

In recent weeks we encountered an issue with the Insurability Status of HUD Homes. It appears that homes listed as insurable (IN) by HUD may still not meet all FHA requirements of the lenders and their underwriters. If you buy your HUD home with an FHA loan, you need to use the appraisal provided by HUD. However, in some of these appraisals the property condition is specified as “below average”. Banks are not willing to write standard FHA loans, if the property condition is “below average”, even if HUD lists the property as insurable.
 
Here is what you need to do: instead of using a standard FHA loan you may have to use one with a repair escrow or even use the FHA 203(k) Streamline program. We recommend that your lender immediately asks for a copy of the appraisal when an offer has been accepted – we will make sure to remind them – so that we can work together to remedy any potential underwriting issues and get loans closed without any delays.
 
We believe that HUD and NHMSI may not be aware of this inconsistency. We have notified them and asked for clarification. You’ll be the first to know when we hear from them!
 
We are once again near a record low when it comes to HUD Home listings in Central Ohio – only 56 this week. HUD added only 11 new homes this week, however, there are plenty of relists. Some of them you will probably recognize.

Listing Statistics

Total homes available: 56 (last week: 71)

Owner occupants: 34
All bidders: 22
New listings: 11
Relisted/Price reduced: 23
 
Median Price: $66,500 (last week: $74,000)
Average Price: $75,395 (last week: $78,740)
Highest Price: $196,000
Lowest Price: $3,600
 
Homes less than $50,001: 19 (last week: 23)
Between $50,001 & $100,000: 25 (last week: 30)
More than $100,000: 12 (last week: 18)
 
Call me TODAY at 975-9650 and check out a HUD Home this weekend!  

Thanks for reading our Columbus HUD Homes Blog
Posted by: Susanne Novak, ABR, FIS, GRI 
Columbus Realtors specializing in
HUD Homes, Shortsales, Investment Real Estate
(614) 975-9650

This question may seem strange, however, you probably noticed that many of the nicer Columbus HUD homes have been selling above list price. You may wonder, if there are any disadvantages by bidding higher than list price?

Many people fear that they pay too much for a house. When you get caught up in a bidding war with other buyers, you may end up offering more than you had planned. However, many HUD homes are worth more than they are listed for (an experienced realtor can give you the correct value and comparable sales). Sometimes you get a great deal, even if you pay more than asking price.

When it comes to financing your purchase, you may encounter problems when you offer more than the appraised value. Let’s look at different financing options and the consequences of bidding above list price:

As a Cash Buyer you can offer as much as you like, even above the appraised value or list price. Just offer what owning the property is worth to you. Nobody else cares.

Buyers using Conventional Financing are required to get a new appraisal. As long as your lender’s appraised value of the property is equal to or above the purchase price, you are good to go. Should your lender’s appraisal come in lower than your purchase price, you may be able to make up the difference in cash, ask for an appraisal review or even order a second appraisal.

When you finance Columbus houses with a VA Loan, your lender’s appraisal again has to come in at or above the purchase price. If this is not the case, you may ask for a reconsideration of value or offer to pay a higher interest rate, so your lender can credit you back some money to offset the difference.

==> Good News for Buyers Using FHA Financing! Read an Important Update from 8/20/09!

==> Unfortunately the practice of allowing 2nd appraisals has been discontinued!

Depending on which lender you use, you might not have to worry about the following scenario.

Buyers financing their purchase with an FHA Loan must watch their offer closely!  The value of a HUD property is provided by the HUD appraiser and posted on the property detail page as the “As-Is Value”. This is also the initial listing price of Columbus HUD homes. This appraisal is valid for 6 months.

If you offer more than the as-is value of a HUD home and want to get an FHA loan, you will have to make up the difference with your own money. HUD will not allow you to order a second appraisal for an FHA loan, even if you feel the property should be worth more than HUD appraised it for.

The same is true for 203(k) Streamline loans. Although you order a separate appraisal to determine the as-repaired value of the property, the original HUD appraisal (as-is value) still stands for the base amount of the loan.

Here’s the good news: You still can get the $8000 tax credit if you are a first time buyer, no matter how much you offer on the house (as long as it’s at or above $80,000), because the tax credit is based on the purchase price and not the appraisal.

I hope this article is helpful for you and provides you with ideas for your bidding strategy.
Please contact me if you have any questions or want to place a bid on a HUD home!

Thanks for reading our Columbus HUD Homes Blog
Posted by: Susanne Novak, ABR, FIS, GRI 
Columbus Realtors specializing in
HUD Homes, Shortsales, Investment Real Estate
(614) 975-9650