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HUD Homes Can Be Great Bargains, But With Some Risk

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Who doesn’t want to score a great deal on a home? Getting a fabulous property for the lowest price possible is one of the primary goals of buyers and their agents.

One potential way to get a good deal is by considering the potential of a HUD home, which is a property that’s owned by the U.S. Department of Housing and Urban Development. But before making any final decisions, it’s critical to explore what the process of buying a HUD property is like, as it is different from purchasing a typical home. As such, you’ll want to know what these differences are before you buy.

Considering they’re foreclosures, it’s common to perceive HUD homes as those that require a lot of work to bring them back up to par. While this is certainly true for many HUD homes, there are still plenty others that don’t necessarily need much TLC. In fact, about 30% of all HUD homes are move-in ready, with another 30% to 40% needing just a minimal amount of work to update.

But while HUD homes can be solid purchases, it’s wise for buyers to approach the process with caution and get well acquainted with the potential risks. Considering the magnitude of such a purchase, it needs to be approached very carefully.

What Exactly is a HUD Home?

While these homes are owned by the government, they weren’t always. In fact, they’re properties that were previously owned by homeowners who financed the purchase using an FHA-backed mortgage. These types of home loans are generally easier to qualify for compared to conventional mortgages mainly because the required down payment amount is lower.

These homes end up in the hands of the federal government when homeowners default on their mortgages and the homes wind up in foreclosure. When HUD takes over the home, its goal is to sell it in order to recoup its money.

What Advantages Do HUD Homes Offer Buyers?

The biggest benefit to buyers when it comes to purchasing a HUD home is that they’re priced to sell and therefore come with a cheaper price tag compared to a conventional home. Neither banks nor the government are interested in hanging onto foreclosed homes longer than they have to. That’s precisely why they’re generally offered at good prices to attract buyers and get them off their hands.

In addition to a cheaper listing price, the HUD also offers incentives to attract buyers. For starters, buyers may be able to take advantage of certain allowances to cover closing costs or repairs. The HUD may pay as much as 3% of the closing costs, though this number needs to be negotiated when bidding on the home. HUD will also cover the escrow fee, which can save buyers hundreds of dollars at the end of the day.

Another perk goes to buyers who are owner occupants, as they are favored over investors, which can come in handy in the middle of a bidding war. And those who work as community employees – including emergency personnel, police offers, teachers, and so forth – can take advantage of a major bonus: those within this category who plan to live in the home for a minimum of 3 years can get as much as a 50% discount on the purchase price through the “Good Neighbor” program.

Potential Drawbacks of Buying a HUD Home

While there can be significant cost savings when it comes to buying a HUD home, there are certain disadvantages to be aware of as well.

These homes are typically sold for less simply because of the assumption of more risk, as these sales don’t come with any type of warranty. When these homes are visually inspected by buyers, the water and utilities are typically shut off, which can make it more difficult to accurately assess the condition and functionality of a home. It’s possible for issues to be discovered after the buyer moves in and turns on all the lights and taps.

That’s why it’s important to ensure that a home inspection clause is inserted into a purchase agreement to provide the opportunity to uncover any potential issues that would warrant a dead deal. It’s also recommended that buyers bring in government inspectors to ensure that there aren’t any code violations with the structure. If issues aren’t discovered before the contract becomes binding, buyers could be left with a money pit that could cost them dearly. It’s not uncommon for buyers to actually come out the other end having spent more money than they had originally intended to simply because they were unfamiliar with the process. 

The Bottom Line

The process of buying a HUD home is not that easy, and as such, it’s not a transaction that you want to tackle on your own. Having a real estate professional who’s well versed in purchasing HUD homes will prove to be extremely helpful in ensuring that you get a good deal while navigating the entire transaction seamlessly with minimal hiccups.

The key to a successful HUD purchase is to fully understand all the ins and outs that come with such a transaction and what the requirements are before putting in a sizeable offer.