Save Money by Buying a HUD Foreclosure

The U.S. Department of Housing and Urban Development (HUD) insures certain mortgages. If the mortgage is foreclosed, the bank servicing the mortgage then goes back to HUD to be reimbursed for its losses. HUD then becomes the owner of the property.

For many years, the notion that HUD sells these foreclosed properties for $1 has been widely, and erroneously, circulated. The Dollar Program is limited to local governments. Still, individuals can find HUD deals.

In 2005, I purchased a HUD foreclosed home and saved $30,000. I learned how to navigate the HUD process through trial and error, and it was not always a pleasant experience. I am sharing my expertise here in the hopes of helping others fulfill their dreams of home ownership.

Line Up Financing

While many HUD foreclosures are purchased with FHA-insured loans, the department does not provide financing directly. Buyers must secure independent financing, and there is usually a limited time between acceptance of your bid and a required closing date. It is advisable to obtain approval prior to placing your bid to ensure that you have qualified for enough money to purchase the home you choose.

The HUD Home Store

Once you have your financial criteria set, visit the HUD Home Store. Here you can search the department's inventory of homes available for sale. Homes will either be listed under a closed bid period, meaning that there is a deadline by which all bids must be received or an open bid period. For houses in an open bid status, the closed bid period has most likely expired without an acceptable bid. Time is of the essence for open-bid homes as the house may become unavailable as soon as the first acceptable bid is received.

Homes will also be categorized as having an "Exclusive" listing or and "Extended" listing period. Only owner-occupants, government and non-profits may bid on "exclusive" properties. Anyone, including investors, may bid on "extended" listings.

Property Condition Report

Once you have located a property that looks promising, hit the tab titled "addendums" on the property listing page. Under this tab, you will find a link to the "PCR", which stands for Property Condition Report.

While HUD makes no official representation regarding the condition of any of its owned properties or the mechanical, electrical, plumbing or heating and cooling systems, the Property Condition Report does list any known problems and issues that need to be addressed. For instance, if the kitchen cabinets have been removed, this will be indicated on the PCR.

Real Estate Agent

Once you have a list of homes you are interested in, enlist the assistance of a reputable real estate agent. In order to gain access to a HUD foreclosure, you must go through an agent affiliated with a HUD-registered Selling Broker. Only registered brokers can place HUD bids as well. The agent is going to receive a commission regardless of how much or how little work they put in. Deal with an agent that will earn that commission by actually assisting you.

Consider Your Closing Costs

Bids for HUD foreclosures closures can include stipulations for closing costs and escrows for repairs. Do not presume that the real estate commission is non-negotiable. I had done most of the work in finding my HUD home. I even completed some of the paperwork as my real estate agent was inexperienced in processing HUD bids. As a result, I requested that she reduce her commission by $1,000, which she agreed to do. Since the entire bid is considered, not just the purchase price, reducing the commission paid could have made my bid more attractive than one for an equal purchase price that was requesting the full commission amount.

Buy a Lock

This was the biggest surprise in the whole process. Your real estate agent will open the home for you after closing, but HUD does not provide keys nor does it change the locks. You need to install a new lock in order to secure your home.

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