You may be asking yourself a lot of questions such as what is a HUD home? should i purchase one? how will i cover the purchase costs? is it worth it? etc. In this post i will try to explain why you should purchase a HUD home as an investor and even as a first time home buyer. See the reason for that is that it is so easy to purchase a HUD home, virtually almost anyone can do it. Even if you have a bad credit score and history, you can still purchase one and be qualified.
Now first things first, What is a HUD home? A HUD home is when a government-insured loan (FHA) gets foreclosed and the Federal Housing and Urban Development pays the defaulted loan off, and then puts the home on the market. That is the most basic definition i can give to you. These houses go for much cheaper than the market value and are used to help boost the housing market in the US and help give first time home owners a chance to purchase a property at a reasonable price. Now where do you come in? I will try to explain it for the two types of buyers. Home owners and Investors.
I wanted to briefly explain it for home owners as well, because everyone deserves to have a house and be able to purchase one and live in one. Having a house greatly increases your wealth and net worth and can also increase your assets. After explaining this i will also state how an investor can take advantage of this as well and purchase one. For home owners it is fairly simple, if you would like to purchase a HUD home, all you have to do is visit HudHomeStore and search for your neighborhood in which you would like to purchase a house. You will see many or actually zero houses depending on your neighborhood. This varies across the state so be sure to check everyday. Now comes the tough part, you need a licensed real estate broker to put a bid on these houses for you. You are actually competing with other buyers for the houses on the website. So in a sense, it is like an auction. You can find a realtor easily online on the same website i stated. Now you may ask, I don’t have enough funds to be able to purchase a house. Not to worry! you can get a FHA approved mortgage with as little as 3.5% down payment if your credit score is above 580! Wonderful isn’t it? If your credit score is below 580, The down payment is than 10%. As i stated before, these value of these houses are already below market value so the down payment should be minuscule. An example would be if a house is $50,000 and you get a FHA mortgage, your down payment would be $1,750. I would always urge first time home buyers who are very interested in purchasing a property to look to HUD homes as a first option.
Now the moment of truth, should an investor purchase a HUD home. Short answer, Yes and No. There are many reasons i state this and i will try to thoroughly explain them on what i mean by that. First of, i did not mention it above, but there is more than one type of HUD home. The two main types i will focus on is Owner Occupied and Investor. Owner Occupied is when the owner itself will live in the property and for 1 year will not rent it out or sell the property to anyone. The investor one is as it states, for investors. They are allowed to rent or sell it the day they purchase it. I personally having purchased HUD homes before, will tell you the different types of strategies you can and should take.
I will first talk of the investor option, since this may resonate with the majority of you. You can filter this in the HudHomeStore website and see the properties available there for investors. These are available after no one bids on a regular owner occupied property, so they become available to everyone out on the market. Now as you can guess, these are either very scarce, or hard to put a bid on. All the investors in the market will have an eye out on these houses, but if you keep an eye out and stay focused, you will be able to purchase one. The benefit of these houses is that compared to an auction or foreclosure house, you can actually go inside the property and do an inspection to see if everything is fine. You can know before hand how much work is to be put into this property. Another good tool to use aside with the HudHomeStore is Zillow and Trulia. Use these two as a check to see the property worth, taxes, rent prices, and crime rate for that neighborhood. All of these items should factor into your final decision into purchasing the property.
The second option i wanted to talk about is more for seasoned investors and it is something i have used, and still use for myself as well. This option is to purchase the owner occupied property. Now you may be thinking, This guy is insane! Why would i take that burden upon myself for a year and lose out on all the cash flow! The answer is simple. You wont be losing out on much for the year. Now let me explain my logic behind this. I will actually use a property i purchased as an example. I purchased a HUD home in Buffalo, NY. The neighborhood was amazing, the taxes were low, the market value for the house was fairly high compared to what i paid for the property and now i can easily make over $30,000 if i wish to sell it today. I will break it down to you in numbers so you can understand my point of view better. The property i purchased was for $37,000. Its market value at that time was $65,000. The house needed absolutely no work aside from cosmetics (Painting, cleaning, etc.) I had a FHA mortgage on it so i paid the 3.5% down payment and my monthly mortgage payment was about $100. The insurance was $50 a month and taxes were about $100 as well. That’s it, i didn’t have any other costs. The reason for this is because i actually did not turn any of the utilities on. I had no need to. I had no one living there so why should i activate any of my utilities? there was no purpose to those extra costs. I kept them off until the year was over than i turned them on as soon as i started to look for a tenant for the property. My monthly costs were about $250 a month which equated to roughly $3,000 for the year. Now as you can see, this is why i said this is for more of a seasoned investor, or actually someone who has a good cash flow. After one year, i was easily able to rent out this property for $1,000 a month and was able to get my costs back in 4-5 months. This is a strategy i have implemented and thought of myself and personally it works very well. I know every location is different so i would highly urge you to take into consideration of everything before you implement this within your plan into purchasing a HUD Home.
I hope this post was useful and insightful to all the investors out there. I always try to share my personal experience and strategies i learn and make as i make my investments. If you guys found this useful feel free to share it with your friends and family members and if you would like to share some feedback feel free to leave them in the comment section below!