2.8 min read
As with any real estate investment, pros and cons will be some advantages and disadvantages related to an acquisition of a HUD home.
Buying a HUD home is no different than any other home. In theory, there is more potential to secure a favorable price due to the nature of HUD homes. HUD homes have been repossessed or taken back from the mortgagee by the FHA in a process usually called foreclosure. Because of government policies encouraging homeownership, HUD has no incentive to retain ownership. Also, it will quickly sell the property to the next owner.
There are other pluses to buying a HUD home. But let’s have a look at some of the pros as well as cons of purchasing a HUD home:
- HUD is a motivated seller, and the properties may not be in the best physical condition. The offered prices may be below current or fair market levels. For an owner-occupier, this allows them to get started on the property ladder at lower costs. It will enable investors to “buy low, sell high.” They can renovate and sell on or, alternatively, buy a HUD home, renovate it and rent it out to achieve attractive investment returns;
- HUD-owned homes have already been appraised. Their market value in their current condition has already been assessed. As long as the agreed price is the same or close to the appraised value, this should facilitate a faster closing process. In turn, this subsequently means an earlier move-in date for an owner-occupier or work commencement date for an investor;
- A buyer will have part of their closing costs covered as HUD will cover up to 5% of the purchase price. Again, this is to primarily help make the properties more saleable. It also encourages buyers with only enough money for a deposit or downpayment to bid for properties.
- As part of government policies to encourage home ownership in the US, owner-occupiers bidding for properties have first priority and an entire period of 30 days to agree on a price and terms. Then the investors have to wait until the end of this period to be able to bid for a property. This creates uncertainty for investors as the property may well be sold within such time;
- It’s not unusual for HUD properties to require some repair and maintenance as, possibly, the previous occupant could not spend money on keeping the home in good order. This often occurs. If they cannot meet mortgage payments, they will usually not be concerned about repairs, etc. Consequently, HUD homes may require some significant repairs, and these need to be factored into the price;
- If the home is not FHA insured, it may be challenging to finance, either due to its condition or some other factor;
- despite the property already being appraised and terms for sale agreed being quickly agreed upon, the process of HUD and/or FHA can be relatively slow, and closings, in reality, can take up to two months or more;
- discussing terms and pricing can only be done through a HUD-approved real estate agent, so the buyer has no direct contact with the decision-makers;
- For buyers looking for a particular type of property in a specific area, there may be few options to choose from. This is because mortgage defaults or foreclosures do not occur daily, especially if the economy is strong.