You’ve found your dream home and it’s a HUD foreclosure. She toured the house from HUD and it appears to be in good shape, just a few minor repairs.
Unfortunately, you’ve already made a big mistake. His real estate agent, who is his uncle, has never sold a HUD foreclosure. He has no idea how much he should offer for a HUD foreclosure. Your uncle is not a loner; most real estate agents do not have experience with HUD foreclosure listings.
First, a little about what you can and can’t do when shopping for HUD foreclosures:
1. You cannot buy HUD foreclosures without a real estate agent. A real estate agent does not have to receive special training to sell HUD foreclosures. Personally I think they should have mandatory training. An inexperienced real estate agent can cost you thousands of dollars in mistakes. Again, you must use a real estate agent to purchase HUD foreclosure listings.
2. You don’t have to offer list price. HUD foreclosures are listed at FHA-assessed “market value.” In my experience, HUD foreclosures are listed somewhere within 20% of market value, either too high or too low.
3. If HUD’s foreclosure listing is new to the market, you won’t get it at 50% off the listing price. You are wasting your time with a low offer. But, if the HUD house has been on the market for 3-4 months, then a low offer might work.
4. HUD will pay up to 5% of the purchase price for the buyer’s closing costs. The amount of the buyer’s closing costs that you want HUD to pay must be on the initial offer form.
5. HUD will pay up to 5% of the purchase price for real estate agent commissions and must also be on the initial offer form.
Ok, so what do you offer? HUD’s foreclosure bidding process is just a numbers game for HUD. They don’t care what you offer; they look at what they get from the sale of HUD foreclosure listings.
If the foreclosure of the HUD home is new to the market, HUD will generally accept 85% to 88% of the net list price to HUD.
For example, the HUD home you want to make an offer on is listed at $100,000. Your uncle, the inexperienced agent, will be paid 5% of the purchase price in commission, and you want HUD to pay $3,000 of your closing costs.
What do you offer for HUD to get 88% of the list price? You must take what you know and work back to the figure you don’t know, the asking price.
You know what you want HUD to get and what costs HUD will pay. First, you want HUD to net $88,000 ($100,000 X 88%). He wants HUD to pay $3,000 of his closing cost and pay his uncle, the inexperienced agent, a 5% commission.
You take $88,000, add $3,000 of closing costs, and you get $91,000. You still have to calculate on your uncle, the inexperienced agent, the 5% commission. $91,000 is the figure without the 5% agent commission, or is 95% of an unknown amount. You divide $91,000 by .95 and you get $95,790. That’s how much you can bid and HUD will net $88,000 with HUD paying $3,000 closing costs and 5% buyer’s agent commission.
How do I determine that HUD will accept 85% to 88% net of the list price? HUD publishes offer results and offer statistics on all of its HUD foreclosure listings. The offer results are accepted offers, and the offer statistics are all offers, including those that were not accepted. I am a CPA, so I enjoy working with numbers. I have also brought in HUD foreclosures to fix and resell. I want to buy HUD foreclosure listings as cheaply as possible.
This example is for foreclosures on HUD homes that are new to the market. It’s a different ball game if HUD homes have been on the market for 2-4 months.
You should also remember that whoever makes the highest net offer to HUD gets the HUD foreclosure.
What to offer for HUD foreclosures is not difficult to determine if you or your real estate agent have the experience or knowledge of buying HUD foreclosures. It’s just a numbers game for HUD and it’s easy to figure out the numbers that HUD will accept for HUD’s foreclosure listings.