How to Buy And Flip a HUD Home

How to Buy And Flip a HUD Home

If a HUD home has caught your eye, you might think it’s perfect for fixing and flipping.

It needs some repairs before it will appeal to buyers, and that’s exactly what the flipping process entails.

However, before you go ahead, there are important facts about HUD homes to consider.

Why should you buy a HUD home?

If you’re a house flipper, purchasing a HUD home comes with many benefits.

One of the biggest is that you can usually purchase it at a much lower price than the market value.

In order to reap the benefits of a HUD home, you need to know more about how to buy and flip it.

Here’s a rundown, first looking at how we can define a HUD home.

What Is A HUD Home?

hud department building

A U.S. Department of Housing and Urban Development (HUD) home is a home that went through foreclosure because its previous owner had a FHA-insured mortgage that was insured by the government but could not make the payments on it.

The Federal Housing Administration took possession of the property.

This HUD home was then put back on the market, probably for a price below the market value.

Based on this, a HUD home can be a valuable investment property to purchase, especially for house flippers.

HUD homes are sold “as is.”

Whether or not the home is in good condition, it’s up to the buyer or property investor to make all the necessary repairs and renovations on it.

Flipping HUD Home: Why It’s A Good Idea

There are various benefits to fixing and flipping HUD homes. Here are three important ones to bear in mind:

  • You don’t have as much competition when bidding on HUD properties, because the process takes a bit more time.
  • You can get an excellent deal on a HUD home that would have usually had a higher listing price.
  • By checking out the HUD homes that have been listed for a long time on the market, you can get an even better deal. If a property’s been available for a few months, there will often be lower offers more readily accepted for it, so it’s worth taking these opportunities.

How To Buy A HUD Home

house for sale sign

When they get foreclosed, HUD homes are sold through a bidding process.

It’s essential to hire a real estate agent who is a registered bidder with the HUD and who can help you find a HUD home in this way as he/she will be able to accept bids on your behalf.

Pro tip: Make sure your real estate agent has a government-issued NAID number that enables him/her to take part in this process. 

Here’s what happens when your bid is accepted:

  • Your real estate agent will notify you and you’ll get a settlement date that’s usually a month or two from the date of your accepted contract, as The Balance explains.
  • You will have to sign a contract and make a deposit on the HUD home. This needs to be payable to HUD and the amount is not refundable.
  • You will pay a deposit of between 1 and 5 percent of the purchase price, and this will have to be paid with your bid.

Owners Get Priority When Bidding On HUD Homes

auction bidding

As a house flipper, it’s important to understand that owner occupants have priority when it comes to placing bids on HUD homes over investors.

This has the drawback of sometimes making it difficult for you to get the chance to make an offer on a property that you really like because you have to wait 30 days before you can bid on it.

How To Prepare A HUD Home For Flipping

A HUD home in need of repairs sounds like the perfect investment property to fix up and flip, but it’s important to follow some important steps to ensure that it makes you a profit.

Make Sure You Inspect The House

house inspection

It’s always essential to give the HUD home a thorough inspection before you make an offer on it.

Doing this will help you figure out what bidding price to settle on so that you don’t pay too much for it.

In addition, you’ll see if the home is really something you can work with or if it requires too many renovations that are not within your budget and which can, therefore, cause you to lose profits.

Pro tip: You don’t need to consult with the local listings broker to view the house – any agent registered with the HUD can gain access to the home. 

Get An Air Quality Audit

In some states, sellers are legally required to inform buyers if the property was previously used for methamphetamine production.

However, other states don’t have these laws.

Therefore, it’s a good idea to do an indoor air quality audit during the home inspection for your HUD home, especially since meth exposure can be harmful to people living in the house and professional cleaning isn’t always covered by insurance, as Investopedia points out.

Find Out If It’s Insured

There are two types of HUD homes: insured ones and uninsured ones.

Insured homes tend to be in better condition and require fewer repairs.

That’s something to consider if you’re new to house flipping and don’t want to have too many costly renovations to do.

Uninsured HUD homes need bigger repairs over $5,000.

This is why they can’t be financed with an FHA loan.

bank loan for home

How To Finance A HUD Home

You have many financing options available to you.

These include a traditional loan.

Conventional loans tend to require a 10 to 20 percent down payment, and you’re looking at closing costs that can go up to 2 percent, as SF Gate reports.

Can You Use An FHA 203K Loan? 

A 203K loan lets you buy a HUD home requiring extensive renovations and finances them in a government-backed loan.

While you might think it’s an option to finance your fix and flip, the sad news is that this loan isn’t suitable for house flipping.

This is due to one of the rules for the loan which states that you have to live in the house you have repaired for 12 months.

In addition, a property that is resold within 90 days after being purchased isn’t eligible for an FHA-insured mortgage.

This, therefore, restricts your movements as a house flipper.

What About Foreclosed HUD Homes?

There are some exceptions to the above-mentioned rule.

If the property was in foreclosure, had an FHA mortgage, and was owned by the HUD, it is exempt from the 90-day rule, as the FHA website states.

The problem is that you still have to live in the property for 12 months otherwise you will have committed occupancy fraud, which is when one lies about whether or not the home will be occupied by the owner.

Find Other Financing Options

best bidding offer

Based on the limitations with foreclosures and loans, it can be beneficial to you to find alternative financing for the HUD home.

This could take the form of investors or partnerships, for instance.

Once you purchase a HUD home, it’s yours to fix, flip, or do whatever you like with it.

Treat Flipping HUD Home In The Same Way As Other Investment Properties

Just because you’re purchasing a HUD home, it doesn’t mean you shouldn’t follow the same process you’d follow for other investment property, such as choosing a home that’s in the right location.

This will ensure that you make a decent profit from fixing and flipping the HUD home.

It can be all too easy to get distracted by an appealing selling price, but don’t let that get in the way of the bigger picture.

You don’t want to be stuck with a house that has serious problems, such as those pertaining to its structure, or that won’t sell when you’ve fixed it up.

Related Questions

Where Can You Find A HUD Home For Sale?

The easiest place is on the HUD Home Store, which provides updated info on available homes for sale.

Use the search box on the site to search for homes within your price range as well as other defining features you’re interested in.

Are Higher Bids For HUD Homes Prioritized?

While the HUD will accept bids that are approximately 11 percent less than the asking price for the house, and even lower if the house has been on the market for longer than 60 days, the competitive bidding system does mean that higher bids are prioritized over lower ones.

Bottom Line

While buying a HUD home can seem like a complicated and lengthy process, it really isn’t once you take the time to find a HUD-approved real estate agent and do your research into the properties you’re interested in purchasing.

In fact, HUD homes can be perfect for buying investment properties at low prices to maximize your profits from house flipping.

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