While you are shopping for homes, you may come across HUD homes that go for prices that seem too good to be true. While the prices may be low, it’s for good reason. HUD owns the home because the previous owner defaulted on their mortgage. This left HUD with possession of the home, which they now want to sell.
Before HUD lists the home as a standard sale in the MLS, they try to auction the home. This means they take bids on the home and typically take the highest bid, assuming it’s close to the price they needed to make their money back.
So how do you go about this bidding process? We walk you through the steps below.
View the Home
Your first step should be to look at the home. Sometimes HUD allows potential bidders to look inside the home and sometimes they don’t. Try to stick to the homes that you can look inside, especially if you will need financing to buy the home.
Look closely around the home. Does it look like everything is in decent, working order? Or does it look like the home is a hot mess and needs fixing up? If it won’t pass the minimum property requirements required by most loan programs, you may not get standard financing.
The good news is that there are a few renovation loan programs out there, including the FHA 203K. This loan program allows you to buy the home and gives you money to fix it up. You can even close on the loan long before you start any renovations as long as the lender is up to date on the renovations you will make, agreeing that the renovations will bring the home up to code.
Get Your Financing in Order
If you aren’t paying cash for the home, now is a good time to get your financing in order. At the very least, you should have a pre-approval for the amount you plan to bid on the home. This way you can move forward with the loan process quickly should you win the bid.
It’s a good idea to have your lender underwrite your part of the loan. This means that the underwriter will look at everything regarding your income, assets, and employment. The underwriter can clear you of all stipulations regarding your income, debt ratio, credit score, and assets. That way all that is left is to clear the home with the title and appraisal work and you can be well on your way to owning a HUD home.
Making the Bid
Now it’s time to make the bid. You will have to do this with a licensed realtor. The bidding process is sealed. In other words, you make your bid and no one but you and the realtor know how much you bid. HUD accepts bids up until a certain date – they usually give it two weeks before they close the bidding. You should know, that HUD gives preference to owner-occupied buyers at this point in the game. If they don’t receive any qualified bids from owner-occupied buyers at that time, they may open it up to investors.
Once HUD has the bids, they go over each of them to decide which one is the right bid to accept. Typically, they accept the largest bid, but that’s not always the case. For example, if there is a cash buyer that bids $5,000 less than the highest bidder, but the highest bidder needs financing, they may take the cash buyer’s offer.
You can find out from your real estate agent or visiting HUD’s website who won the auction. Although if you won the bid, HUD would be in contact with you right away to let you know the next steps you must take.
If you don’t win the bid, don’t get discouraged. You can always try another HUD home or wait to see if the deal falls through. If it does, the home might even get listed on the MLS as a standard sale and you won’t have to worry about the sealed bidding process again.