The U.S. Department of Housing and Urban Development oversees public housing and community development. One of HUD's main focuses is helping low- to moderate-income households secure affordable housing. HUD also runs a variety of programs aimed at helping homeowners avoid foreclosure. When foreclosure can't be prevented, HUD sells the foreclosed homes to recoup the loss. If you are considering purchasing a foreclosed home, you have likely heard of both HUD homes and REO homes. Although the homes share some similarities, the buying process is different.
HUD homes are residential properties acquired through the foreclosure of a Federal Housing Administration insured loan. HUD becomes the owner of the home and sells it to recoup the loss. Only qualified real estate brokers certified through HUD have the ability to sell the HUD homes. If you are working with a real estate agent who is not registered with HUD, you won't be able to submit a bid. HUD homes can purchased at prices well below market value, according to Realty Trac.
REO stands for real estate owned, but the bank is actually the owner. When the bank forecloses, the lender often attempts to sell the home in a foreclosure auction with the opening bid equal to the loan balance. If the home does not sell, the bank regains ownership of the home. Some state foreclosure laws automatically bypass the auction and transfer ownership back to the bank when the owner defaults. REO homes are often priced below market value and can be a good investment opportunity for the savvy buyer.
Buying a HUD Home
HUD does not offer financing. You will need to secure your own financing prior to submitting an offer. HUD homes are sold through a bidding process. In the initial stage of bidding, priority is given to buyers who intend to use the home as a primary residence. All offers are reviewed at the same time, with the highest bid generally accepted. If the home remains unsold, investors are welcome to submit offers. Each offer is reviewed as received.
Buying an REO Home
It is best to contact a lender to get pre-approved for a loan before you shop. Your real estate agent can show you the properties and submit an offer to the bank. Along with your offer, provide a good-faith deposit equal to 1 percent of the home's purchase price. The bank may accept or present you with a counter-offer. REO homes don't offer priority to owner occupants. Unlike purchasing a home at a foreclosure auction, you know an REO home will have a clear title. Any liens are removed prior to placing the home on the market.
Both HUD and REO properties are sold as-is. Repairs and renovations will not be made. Basically, what you see if what you get. Have an inspection done prior to submitting an offer to reveal the condition of the home. HUD programs are available to help with necessary repairs for HUD and REO homes. The 203(k) program extends repair funds to buyers and rolls the amount borrowed into the primary loan to make it more affordable. To qualify, you must be using an FHA loan.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.