How to Win on HUD Home Bids
Many of today’s savvy home buyers are considering the different home buying opportunities available from Short Sales, Bank Owned Homes (Foreclosures), and the like. One of those options is New Mexico HUD homes. A New Mexico HUD (Housing and Urban Development) home means a house that has gone through the foreclosure process on an FHA-insured mortgage and is now owned by the federal government or HUD.
Buyers need to understand that all real estate transactions are not created equal, and today’s buyer needs to be familiar with the complexities and differences in each. Often these differences may dictate the type of loan you can acquire, who pays certain closing costs, or if there is a home warranty, for example. Here are the first four critical components of How to Win on HUD home bids.
- Get Pre-qualified FIRST. There is no point in attempting a bid on a HUD-owned property if you are not either pre-qualified with a supporting letter from your lender or have proof of funds for a cash purchase. HUD will not consider offers without this!
- Hire a New Mexico Realtor certified by HUD to facilitate a New Mexico HUD Home transaction. The Realtor must have a current NAID number to act on your behalf. You MUST have a real estate broker representing you. A small percentage of New Mexico Brokers/Realtors have this necessary NAID certificate.
- Have your Realtor conduct a search for New Mexico HUD-owned homes for sale or search HUDHomeStore.com website. Sometimes a house may show ACTIVE in your MLS but be in a PENDING status with HUD. Your NAID-certified Realtor should investigate this.
- HUD typically makes its initial offerings to Owner Occupants, not investors. Knowing this helps you as a buyer not to be concerned with investor bidding, at least initially. If a property has not sold after some undetermined timeline by HUD, they may elect to make the home available to investor-type buyers.
Once you have selected a New Mexico HUD home to buy, pay close attention to the BID DEADLINE! If you surpass that deadline, you may not have another opportunity to bid. If HUD does not receive an acceptable offer, they may reset the Bid Deadline and possibly adjust the price.
Be mindful of how you bid. When New Mexico HUD homes go on the market, it has already been appraised using FHA guidelines. The FHA appraised value is the initial asking price of the home; if the buyer bids above the asking price, and often they do to obtain the winning bid, then the buyer may be on the hook for the additional amount over and above the listed or appraised price. This does not become part of the loan amount; this is extra CASH due at closing from you.
HUD may pay up to 3% of the buyer’s closing costs. This sounds attractive upfront; however, HUD sees most closing costs in a transaction as the buyer’s responsibility. For example, The owners’ title policy is typically paid by a seller, at least in New Mexico. The Department of HUD sees this as a buyer’s fee. This may also hold with a survey, inspections, etc. So the buyer is now responsible for more closing costs than is the norm for most buyers in our market.
Now back to the BID process.HUD will pay up to 3% of the purchase price; however, like any other seller, HUD is considering the NET amount to them at closing. Another bidder may bid the same amount as you did but didn’t ask for the 3% concession, so the other bidder wins! A caveat is that HUD does not just look at their final net-out. Suppose a buyer offers cash vs. a loan scenario, and the offer price is similar. In that case, HUD may take the lower CASH offer to expedite the closing and remove any possible loan contingency issues.
When your Bid is accepted, HUD will notify your broker. Sometimes HUD may not acknowledge you as the winning bidder but instead engage in a counter-offer scenario. Once both parties agree, your New Mexico HUD-certified Realtor will have you sign the necessary contracts, addenda, and disclosures. A NAID-certified broker also understands that all contract documents must be signed in their original with Blue Ink (no exceptions) and sent overnight to HUD. No email, No Fax..it must be the original documents, period!
HUD highly suggests having a home inspected before the offer process; however, it would be a fundamental and minimal visual inspection of the structure since utilities are almost always off, and HUD may not allow them to be turned on without authorization and a valid accepted contract. A big part of any home inspection involves working electrical systems, plumbing, running water, appliances, etc.
HUD does provide a PCR or Property Condition Report and a Property Condition Summary or PCS. This is an inspection that tests the inoperative systems using generators for the electrical service and air pressure for the water system and shares their findings. A visual inspection is also provided. We always suggest getting your own inspections.
The Summary report gives an estimated amount for any repairs that may be needed. This is also necessary for rehab-type loan scenarios.
Once HUD notifies the buyer via his/her agent of acceptance, the clock starts ticking very quickly toward completing a home inspection, loan processing, and closing. HUD typically mandates the close date at this point. You can now conduct and complete any home inspections at the buyers’ sole expense.
Turning on Utilities, if allowed, is also at the buyers’ expense and arrangement. Setting up utility turn-on, inspections, and utility turn-off (also mandated by HUD within 72 hrs of a turn-on) can be a strategic timing dilemma at best. For example: If the home has been vacant for an extended period and most of them have been, the utility companies have likely removed the Gas and Electric Meter, the water has been turned off, and the home winterized (water heater drained, toilets drained, etc.)
For a Gas Meter to be installed, a licensed plumber must be hired to conduct a preliminary inspection and pull a city permit; the package cost (is $250.00 plus). If that plumber or City inspector finds issues, those items must be addressed (repaired), or no green tag is issued for installing the gas meter. The same is true with the electricity; for the electric company PNM to turn on service, an Electrician must first be hired to inspect, pull another city permit and have the service inspected by a City Inspector ($280.00 plus). If all is clear, then a green tag is issued, and the Electric company sets a meter and or turns on the service.
Buyers should remember that this is all at their expense, regardless of whether the home closes escrow. The water utility must also be turned on; any deposits are at the buyer’s expense, and the buyer is liable for any damages caused by any utility turn-on. Your Realtor must provide access to each of these events.
BUYER BEWARE! Inspections are for the buyers’ information only! HUD does not and will not make any repairs, period. When you purchase New Mexico HUD homes, you buy the home AS IS WITH ALL FAULTS AND DEFECT. So what you see or don’t see is what you get. This is where the rubber often meets the road. For example, if the inspector discovers a defect in the roof, it could easily jeopardize your ability to acquire an FHA or VA (government-backed) loan.
Certain defects can deem a property substandard according to FHA/VA guidelines; repairing the defective item is paramount to successfully underwriting the loan. So a catch-22 scenario exists where the seller (HUD) will not make the repairs, and the buyer is not allowed to make repairs before closing escrow. The catch is that buyer’s lender will not underwrite the loan until such defects are cured. HUD works to overcome this issue with targeted loan programs called Rehab Loans or 203(k) loans. These are complex, and few lenders will tackle the challenges of a 203(k). That is another article for another day. That said, a buyer is wise to understand what the inspection reveals and if they have the necessary means and funds to fix those issues and other possible issues that may arise after closing.
A buyer states in the initial contract if they plan to be an owner-occupant or an investor. If you are stating you will be an owner occupant, you are legally bound to occupy the home for at 1 yr before selling. You can not have owned a New Mexico HUD home within the past 24 months.
If inspections are behind or the loan process is lagging, HUD does allow for an extension of the close date; however, this is a fee-based extension to the buyer and gets expensive quickly. The extension must be approved in advance. If the close date passes without closing or extension, the contract is considered null and void, with HUD taking possession of the buyer’s earnest money.
The title company handling the escrow must receive the buyer loan package and instructions from the lender 72 hrs before closing. The lender must be made aware of this. HUD must review and accept the final HUD 1 or closing statement before buyers closing and signatures.
HUD requires a buyer to attend the closing physically. Buyers may NOT close remotely and then send closing documents to the title company. So if a buyer is purchasing long distance or is out of town, arrangements must be made for the physical signing by a power of attorney.
Funds for closing must be available at the time of closing. New Mexico is NOT a table fund state, so the normal is for funding to happen the following day. This is unacceptable by HUD. Your lender must make the necessary changes to make funds available.
Once the closing is completed, the buyer can take possession. The buyer, however, must make provision to re-key the home’s locks. The buyer may not retain the existing keys. The buyer can now turn utilities back on and enjoy occupancy of their new home.
This series on How to Buy A HUD Home in New Mexico has been presented with a fair amount of detail, but this does not cover all details by any means. My objective here is not to instill fear but to educate and prepare you. Purchasing New Mexico HUD homes is complex, and knowing the expected protocol will mean the difference between success and failure. When done correctly, buying a New Mexico HUD home can be lucrative. As discussed earlier in this series, having a HUD-certified and knowledgeable Realtor is paramount to your success.
John McCormack at Albuquerque Homes Realty; has the knowledge, experience, and NAID Certificate to help you succeed in your New Mexico HUD home purchase.