That is correct. The new HUD rules call for an initial 10 day period when only owner occupant or not-for-profit organization bids will be considered. After ten days, investor bids get consideration. It’s not clear (at least to me) if investors can submit bids during first ten day period, and those are held until they are eligible to be considered, or if early bids are disqualified. Also, if you submit a bid, be sure that your broker uses the new (January 1999) HUD contract form. If the old form is used, your bid will get tossed out.
I’ve been tracking HUD sales in Phoenix for a while, comparing the HUD price versus the ultimate winning bid price. I think I’ll stop wasting time on this, since there’s obviously not much of a chance for an investor to get a good deal here in Phoenix. I wonder if other cities are experiencing the same thing.
Here’s an example over the past two weeks.
Average winning bid: 99.9% of HUD price.
Highest winning bid: 115% of HUD price
Lowest winning bid: 86% of HUD price
Winning bids over HUD price: 57% Under HUD Price: 43%
Average of all winning Bids under HUD price: 93% of HUD price
Average of all winning Bids Over HUD price: 105% of HUD price
The HUD price is typically very close to FMV or ARV. Dry well…I’ll stick to other methods to find deals. If anyone is making money on HUD houses in Phoenix, I’d sure like to find-out how they’re doing it (as if they’d tell me).
Didn’t you see the large, huge, front-page article in the Arizona Republic 3 or 4 months ago about all the corruption among R.E. brokers in Phx. and the HUD bidding process?
I fellow investor just won a bid on a HUD sfh. Small house 3/1 around 950sq ft. Anyway, the house was listed at 52,500. The home needed cosmetic work. ARV around 72,000. The guy bid 64k and of course won. But he already had a buyer lined up and is planning on selling it for 80,000. Now, this guy makes money. And he does so by paying more for the houses. He out bids the competition. Besides, he doesn’t care that he will lose 500 bucks that he has tied up if he lets the contract fall through. He basically has that house locked up for 60days and lines up a double close retail flip. He puts buyers in his homes with not so good credit. He takes back some of the financing and gets them an FHA loan for the other 90% or better. Also helps that his girlfriend is a loan broker. Well, actually, he does the loan work. She is just the license holder.
I guess he likes the fact that he can tie up the property for little money and have it for 60days to get his retail buyer financed. His pay day on that deal will net him 10k easily.
Personally, I have not purchased a HUD home… but the one this guy purchased (well, under contract), I had a bid in at 52,999. well worth it if I could have gotten it…NEXT!!
HUD may be a Source for Deals in Phoenix - Posted by Rick Vesole
Posted by Rick Vesole on May 11, 1999 at 10:18:18:
Don’t let statistics fool you. They may or may not mean that HUD properties are not deals. The reason that so many of them are sold for more than asking price is an indication that they may in fact be priced too low. Remember, HUD homes are sold in “as is” condition and usually require a lot of fixing up. Usually when home’s are sold this way, they have to be priced low in order to get any interest in them.
We have bought several HUD homes at more than asking price and we have made good money on each one of them. Now maybe pricing in Phoenix is differnt than where I live, but maybe not. The bottom line is: go investigate some of these homes and compare them to what else is on the market. If it looks like a good deal, don’t be afraid to bid over the asking price.
I don’t know much about HUD, but there are some deals with VA in Phoenix and probably everywhere else. The opportunity is the financing. The VA financing, currently at 7% fixed, can be easily sold as a wrap. So, you sell the property with new financing you’ve created with the VA as unerlying financing. You pocket the difference for 30 years. The down side is you can run out of money real quickly with this type of investing because you must come up with 10% down to get into these properties. But, most investors are more than willing to pay FMV or even a bit more to create this cash flow technique.
I agree with Piper. This guy sounds bogus to me too. Or else some very “creative” loan brokering is going on. You can’t pay what he pays, mark up $8,000 over fmv and quick sell to people with so-so credit who pay 10% down and get FHA loans. Stick to your bid method and let him keep bidding 21% over HUD appraisal. I suspect that he won’t be doing it very long.
Yes, I should have been a little more clear. I have checked-out several HUD properties to determine if the HUD price was significantly below ARV. The answer was always “no”. The HUD price is definately aimed at owner occupants here in Phoenix, in that the estimates for the repairs factored into the HUD price will bring the property to FMV. For example, a house that has an ARV of $85K, and needs repairs of $5K, is priced at $80K. No room for profit.
Now, I could imagine a home that is in a bad part of town, or that is in too much disrepair to attract an owner-occupant. However, the market in Phoenix is so hot that these properties rarely come-up, and when they do, they go for very close to the HUD price (as my stats show). I just can’t justify spending hours of time to sift through and comp all the HUD properties to find that one property that no O/O or investor has found. In my months of watching the trends, there is no indication that this would be worth the effort, at least here in Phoenix.
Yes…I understand that this is some investors technique. It’s not mine.
This technique is one which pays little recognition to the risks that are ever present in most investments. You’ve taken on a personal liability for the loan, at a price of market value or higher…in return for a spread created by the interest rate differential. IF your new buyer defaults, that spread can get eaten up quickly. IF the property declines in value, you’re on the hook. That wouldn’t be my cup of tea.
I will do deals at market value. But they’re deals that I assign…and they are deals in which I have no personal liability. Just my opinion of course.
Also, It is my understanding that investors have to wait until the “open bidding” period is over. Then HUD will entertain investor bids. This is my take from the information on the HUD website. Anyone that knows any different, please let me know.
Thanks for your thoughts. Good points. But, if you think about this relative to lease option purchase…it’s too similar. You’re taking responsibility for the owner’s payments, property is typically secured at FMV, if the tenant/buyer defaults on the option you are now out of pocket for payments until you get new tenant/buyer. I think l/o is more attractive however, for two reasons: 1) You don’t need the 10% down. 2) If the market does drop, so simply don’t exercise your option. I must say that I do like the idea of appx. 25% ROI on the VA situation. Your payback period on your initial investment is 4 years and the next 26 are profitable cashflow. You also would secure a pretty decent down payment(10%) when reselling these which should reduce your risk of default and holding costs while looking for a new buyer if they do default. I’m with you, this is not for me ritght now anyway. I simply don’t have that much discretionary capital to tie up for 4 years. I do think it has some merits though.