You’ve found your dream home and it’s a HUD foreclosure. You have taken a tour of the HUD home and it appears to be in good shape, only a few minor repairs.
Unfortunately, he already made a big mistake. Your real estate agent, who is your uncle, has never sold a HUD foreclosure. You have no idea how much you should offer for a HUD foreclosure. Your uncle is not just one; Most real estate agents are inexperienced in HUD foreclosure listings.
First, a little about what you can and cannot do when buying 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 compulsory training. An inexperienced realtor can cost you thousands of dollars in mistakes. Again, you must use a real estate agent to purchase HUD foreclosure listings.
2. You do not have to offer the list price. HUD foreclosures are listed at “market value” as assessed by the FHA. 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 will not get it at a 50% discount off the listing price. You’re wasting your time with a low offer. But, if the HUD home 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 it 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 HUD foreclosure is new to the market, HUD will generally accept 85% to 88% of the net listing price to HUD.
For example, the HUD house you want to bid on is listed at $ 100,000. Your uncle, the inexperienced agent, will be paid 5% of the purchase price in commissions 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 have to take what you know and go back to the figure you don’t know, the offer price.
You know what you want HUD to incur and what costs HUD will pay. First, you want HUD to generate $ 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 closing costs, and you get $ 91,000. You still have to calculate the 5% commission from your uncle, the inexperienced agent. $ 91,000 is the figure without the agent’s 5% commissions, or it is 95% of an unknown amount. You divide $ 91,000 by .95 and you get $ 95,790. That’s the amount you can bid and HUD will get $ 88,000 net and HUD will pay $ 3,000 for closing costs and 5% Buyer’s agent commissions.
How did I determine that HUD will accept 85% to 88% net of the list price? HUD publishes bid results and bid statistics on all of its HUD foreclosure listings. Offer results are accepted offers and 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 foreclosures from HUD for me to fix and resell. I want to buy HUD foreclosure listings as cheaply as possible.
This example is for HUD foreclosures that are new to the market. It’s a different game if HUD homes have been on the market for 2-4 months.
You should also remember that whoever offers the highest net amount to HUD will get HUD foreclosed.
It is not difficult to determine what to offer for HUD foreclosures if you or your real estate agent have the experience or knowledge to purchase HUD foreclosures. It’s just a numbers game for HUD and it’s easy to calculate the numbers HUD will accept for HUD foreclosure lists.