First-time buyers often finance their homes through the federal government, primarily by way of FHA-insured loans. When the property owner fails to make mortgage payments on the property, FHA initiates a foreclosure, which commonly results in the agency taking possession of the house and reselling it through a HUD-registered real estate agent.
HUD sells homes “owner occupied.” If you purchase a HUD home, you must sign a document stating that you’ll live in the home for at least 12 months before selling it. You may be tempted to stretch the truth a bit and sign the document even though you have no intention of living in the house, but that’s fraud.
If you’re caught and convicted, you may face a hefty fine and some jail time. Do the right thing. If you don’t plan on living in the house for at least a year, don’t buy it. You can find plenty of good deals on investment properties without committing a felony.
Because HUD homes are sold “owner occupied,” they’re not candidates for a quick flip, but as an investor who needs a place to live, a HUD home may be a good long-term investment. Before becoming involved with HUD homes, however, be aware of the following potential drawbacks:
HUD homes are often sold at market or just below market value, so they're not always the best deals available. You need to assess the potential profitability of these properties as you would any property you consider buying.
The homes that HUD owns are typically low- to mid-market homes repossessed from first-time homeowners. They’re rarely located in the ritziest neighborhoods.
You need to purchase the home through a HUD-registered real estate agent and pay a sales commission.
HUD homes are sold as-is, so have the home professionally inspected before making your offer. After you buy it, you own it, my friend . . . and all the defects that come with it.
One of the big benefits of purchasing HUD homes is that you may qualify for FHA financing. The agency often offers special interest rates for loans used to purchase and rehab run-down properties.
Don’t just assume that because the government is selling the home you’re getting a great deal on a great property. Do your homework. Inspect the house yourself, research comparable property values in the area, and have the home professionally inspected before you hand over your money.
If you’re interested in investing in HUD homes, you can find HUD-approved agents by networking or by checking out HUD homes for sale online. Online listings typically display contact information for the agent who’s listing the home. When you contact the HUD-approved agent, tell the agent if you’re already working through your own agent; otherwise, you can end up in the middle of a messy legal battle.
