19 Buying HUD Homes Pros and Cons

The U.S. Department of Housing and Urban Development guarantees certain properties through the mortgage funding system. If the homeowner decides to default on their payments for any reason, then a repossession occurs if the property is an FHA insured lender. This process is what turns the property into a HUD home.

Because you are purchasing a foreclosure, there is an excellent chance that the condition of the property could be questionable when you submit a bid. You may not have an opportunity to inspect the home before placing a bid on it either, which means you might be going blindly into a property that needs extensive renovation. HUD hires contractors across the United States to help with the cleanup process to reduce this risk, but it is still there nonetheless.

If you decide to move forward with a HUD home, then you will need to have cash available for the purchase or a funded mortgage that you can present. Make sure that you pursue an insured home if you plan to use it as your primary address as these are still eligible for FHA loans. These properties need less than $5,000 in repairs to make them habitable.

List of the Pros of Buying HUD Homes

1. HUD homes are an option for owner-occupants and investors.
Brian Sullivan, who works in the Office of Public Affairs for the Department of Housing and Urban Development, told Fit Small Business that the goal of HUD homes is to bring homeownership back into unstable communities. “The initial marketing period for owner-occupants is to provide a stable presence in a neighborhood that already experienced a foreclosure. Owner-occupants treat homes differently, so HUD’s goal is to provide ownership opportunities to qualified buyers. In turn, this prevents blight in the neighborhood.”

Investors have a chance at these properties too, but they cannot bid on a property until the 16th day that it is listed for sale. Uninsured HUD homes are a little different, allowing for investors to start bidding on the sixth day it is up for sale.

2. There are protections in place to protect owner-occupants from predatory investors.
Investors like the idea of purchasing a HUD home because you can rehab the property, rent it out, or make some profits by flipping it. When the property requires extensive repairs, then the more likely it will make it to the point when an investor can decide to purchase it. Since owner-occupants normally avoid a property with extensive repairs since the rehab process isn’t always inviting, this option can be an effective way to purchase cheap real estate and turn a nice profit.

Some real estate investors might be tempted to pretend to be an owner-occupant when a great HUD home becomes open to the bidding process. The Department frowns upon this action and takes anyone trying to misrepresent their interests seriously. You can receive a fine of up to $250,000 and potential jail time if you lie about your status as an occupant.

3. You can find HUD homes in several different ways.
You can find HUD properties on the government’s authorized website at any time. You can also have a realtor assist with this process by access the MLS. If you know what to watch for in your community, then you will see property signs in the windows of homes that are part of this program as well. Once you determine which properties in your targeted neighborhood are part of this program, then you can pull up its listing to see if it is insured, take a look at any published photos, and decide if it is worth the effort to bid.

4. HUD homes qualify for financing through the traditional mortgage process.
You will want to line up your financing before you start looking for a HUD home because there are strict timelines that you must meet when making a purchase. The Department does not provide financing on its homes, even though many people believe that they do. There are no financing contingencies accepted from investors either. Most insured properties do qualify for a variety of financing methods, including FHA loans, a 203K mortgage, conventional mortgages, private financing, and cash.

If you qualify for an FHA loan when purchasing a HUD home, then you will have mortgage insurance in place to protect the lender in case of default. Some lending products only require a 3.5% down payment, but you can only use a standard FHA loan to purchase an insured HUD property.

5. You do not need to have your deposit ready until your bid is accepted.
All deposits with HUD homes must be in certified funds. If the property in question is valued at $50,000 or less, then you must submit a deposit of $500 in the form of a cashier’s check or a money order. Any homes that are above this valuation will have a maximum deposit amount of $2,000, but not less than $500. The actual amount that you will be asked to put down depends on the current guidelines of the Department of Housing and Urban Development, which can change at any time.

Your realtor must confirm the deposit amount with the asset manager for the property. You will want to review the guidelines of this advantage as well. All deposits are due within two days of being notified of a winning bid.

6. It is up to your realtor to bid on the property.
You will not need to worry about the bidding process when you are pursuing a HUD home. Your realtor is responsible for logging into their account with the Department to find the listing of the property you want. They have 15 minutes to complete the bid from the time they login to the system. No one knows how many other bidders are going after the same property, nor do they get to see how much the bids will be. Relying on the experience of your realtor to offer an amount that is competitive, but not over-valued, will help you to secure a good deal.

7. Most HUD homes sell well beneath the asking price.
Across the United States, the average HUD home will usually sell for about 85% of its asking price. Some states see a much higher percentage though, so you will want to speak with your realtor about the options which are available to you. California, Florida, Texas, and Illinois all see their average bid as a percentage of the asking price reach higher than 92% consistently. Because some properties are $200,000 or more and you don’t get to conduct a property inspection and appraisal until after you are the winning bidder, it is imperative that you identify problematic repairs during the walkthrough to ensure that you aren’t paying more than expected to rehabilitate the home.

8. The closing process is different for HUD homes, but not something unreasonable.
When you start the closing process with a HUD home, then there are some changes that you will experience with the process. If you are familiar with investment properties or a foreclosure, then the steps are similar. The Department of Housing and Urban Development will determine the timeline and provide a closing agent to help with the transaction. You typically have 30 days to close on the property once the full contract is submitted by your realtor and HUD accepts it.

If you need to extend your contract and schedule a later closing date, HUD can deny the request and keep your earnest money. They can also charge you to change the date. You will need to pay for title search fees, title insurance, and find your own title company. The actual settlement is straightforward, paying the remaining balance of the sales price with certified funds or financing. Then you get the keys to your new property.

9. There is less competition in the market for the home that you want.
Because the process to purchase a HUD home is more time consuming than other property options, you will discover that there are fewer buyers who are competing with you for a specific piece of real estate. This advantage applies to investors and owner-occupants. That means it is easier to get a great deal on a home if you are in a position to be patient with the buying process. Since all of the properties are on one site for items across the United States, this method of purchasing or investing is exceptionally convenient.

List of the Cons of Buying HUD Homes

1. Some HUD homes do not qualify for a typical mortgage.
When you start looking at HUD properties in your area, then you may discover that most of them are classified as uninsured homes. This classification occurs because the property requires more than $5,000 in repairs to make it habitable as determined by an inspector contracted by the Department to evaluate the property. These properties are sold in an “as-is” condition, which means they will not qualify for the typical mortgage or an FHA loan.

You will need to look at an FHA 203K loan or a hard money loan if you do not have the cash available to purchase this property outright. HUD will not complete any of the needed repairs, so it is up to you to hire an inspector before bidding on the property.

2. Money for any repairs must go into an escrow account.
Even when you decide to purchase an insured HUD home and intend to live on the property, all of the money for the repairs must be placed into an escrow account before purchasing the home. Buyers are responsible to pay for the repairs noted on the property when they take possession of it. IF the repairs aren’t completed, then you will lose the funds from the escrow repair. Because that can mean you need to have another $5,000 available as part of the closing process, it could be a difficult ask for some home buyers.

3. You must commit to living in a HUD home for at least one year.
HUD classifies an owner-occupant as someone who lives on the property 50% or more of the time. The property cannot become a vacation home for the individual or household making the purchase. Buyers are not permitted to purchase an additional primary residence either. Because you are buying a livable home during the preliminary bidding period, you receive the first shot as an owner-occupant to purchase the property over an investor since this program is meant to encourage ownership, but some properties may not be conducive to occupancy because of their location, structure, or needed repairs.

4. A HUD realtor is necessary to complete the purchasing process.
Most people look for HUD homes on their own time, and there is nothing wrong with that process. You cannot start the purchasing process for the property without a HUD realtor showing you the home, and then bidding on it for you. This process differs from other purchase options where a realtor is optional for the transaction.

You should choose a brokerage that is already approved by HUD because the process to certify can take up to six weeks. Then your realtor can guide you through the deposit that you’ll need to leave (it’s non-refundable), the disclosures on the real estate in question, and a list of the repairs that are necessary.

5. The number of HUD homes in any given state can be quite low.
Although HUD homes were very popular during the subprime lending crisis and a few years after, the number of properties has declined dramatically since. An April 2019 search for all properties listed in Washington State found only 10 options available, with prices ranging from $63,000 to $287,000. Because the bidding period can be short, the total number of available properties can fluctuate dramatically. If you are trying to get into a property immediately, then you may find that there could be zero properties in your targeted neighborhood. With patients, you might be able to find a solid home.

6. Contractors and property inspectors may not catch every needed repair.
When you work with a HUD realtor on a property of interest, a walk-through of the home will get setup so that you can see everything. This event occurs with a contractor and the realtor. Then you prepare the deposit so that you’re not in a rush to have it ready if your bid is accepted. During the walkthrough, it is essential that every element of the home be looked at because a full property inspection can’t be done until you submit a bit on the property. If you can catch egregious errors before putting any money down on the property, then you can move on if the costs seem too high.

7. Your purchase cannot be contingent on the property inspection.
Unlike most other home purchasing contracts, HUD does not allow the home property purchase to be contingent on passing an inspection. You do have 15 days from contract acceptance to conduct an inspection. If you decide to back out on the bid because there are extensive repairs that were not documented as part of the initial listing, then it is up to the Department of Housing and Urban Development as to whether or not you receive your deposit back. It probably isn’t that surprising to hear that most deposits are not refunded in this circumstance, even if the number of repairs is substantially different than what was listed.

8. It can take several days for the local utilities to connect services to the property.
Because some HUD homes are disconnected from the power and natural gas infrastructure of a community for an extensive time, it might take a few days to have the local utilities restore access to these needed services. You will want to contact the local companies before scheduling an appraisal or inspection because both need access to power to complete their findings. There are fees to turn them on, which can sometimes be several hundred dollars. HUD is at their discretion when deciding to pay for it or forcing you to do so.

If your home is in a colder climate and the purchase occurs in early winter to late spring, then you will likely need to pay to de-winterize the house to prevent pipes from freezing as part of the utility process. Should the utility workers detect a leak in the property, then they won’t turn on the needed services – which means you can get the appraisal and inspection finished.

9. The entire purchasing process can take at least 6 weeks to complete.
Assuming that everything works according to plan with your pursuit of a HUD home, it takes the average investor or owner-occupant at least six weeks to close on the property. In the first week, you will need to find and evaluate the real estate that is available in your targeted community. Then you must have financing preapproval and find a qualified realtor. By the third week, you’re going through the walk-through, getting your deposits ready, and budding on the home.

Schedule your property inspection on the fourth week within 15 days of thee accepted contract. The lender will send out an appraiser for non-FHA loans (FHA loans use the appraisal on file). Then you finally get to go to closing.

10. You must have strong financing in place for a successful experience.
Because the HUD process for buying a home can change often, you never really know how much money is necessary for the deposit. You might not be able to get it back, even if you could in previous opportunities. Since there is no way to have contingencies in the contract, you must have strong financing in place before approaching the purchasing process. You cannot wholesale homes through HUD easily and it can be an arduous process, but it is also one that can be quite rewarding.

Don’t be intimidated by the various rules, deadlines, and stipulations that are part of this potential disadvantage. A HUD-approved realtor can guide you through the steps with relative ease. Then work with a lender (if necessary) to get the financing options that are necessary, with many offering up to 75% ARV and 90% LTV when you purchase a property that you really want.

A Final Thought on the Pros and Cons of HUD Homes

HUD homes can provide you with an incredible investment opportunity. You can also save some money on an insured property if you plan to be an owner-occupant since most will sell for less than their advertised value. Because there are so many different rules to follow, including bid deadlines that you must meet, it is imperative to have an experienced realtor who is familiar with these properties helping you every step of the way.

Depending on where you currently live (or want to live), the number of days that a HUD home stays on the market can be quite short. Florida properties often sell in 17 days. Properties in Texas typically sell in 27 days, while real estate in New York through HUD takes an average of 61 days to sell. You may need to move quickly to secure the property that you want.

The pros and cons of HUD homes are essential to consider because each key point can help you to find the best property for your specific needs. Whether you are an investor or plan to make this real estate your primary residence, you will find that there are some great deals waiting for you out there right now.