As Real Estate Investors across Texas prepare for Tuesday's foreclosure and tax lien auctions, many investors are finding better deals outside of the "Texas Tuesday" sales. The best source of REO properties that I have found is buying foreclosures straight from the Department of Housing and Urban Development. These are properties that were purchased with a loan backed by HUD, that have since been foreclosed on. There are 5 main reasons that I personally invest in these properties and skip the crowds and excitement of the courthouse auctions.
Online Sealed Bid Auction Format - All HUD foreclosures are auctioned off online in a sealed bid format. Each day, HUD reviews the bids that were submitted for a particular property that day, and if any of the bids are higher than their Minimum Acceptable Offer (MAO), that is the winning bid. That means there is no emotion to contend with as you try to outbid someone else, and no excitement of the auction to get swept away in. You simply tell them the price you're willing to pay, and if it happens to be the highest bid, you win. HUD doesn't even try to solicit higher bids as other government agencies do. In the case of Fannie Mae, they will take the two highest bidders, and ask them to submit their highest and best offer. With HUD, the bidding closes each day, and the highest bid over their MAO takes the property.
Vacant Properties - Every property that HUD has foreclosed on is vacant - HUD has already taken possession of the property. When you buy a property on the courthouse steps, removing the previous owner from the house becomes your responsibility. That means you have to post eviction notices, call the Sheriff if the old owner won't leave, pay to move and store anything they leave behind, and worst of all, not know what kind of damage they are going to do on the way out. I have seen too many instances of angry people doing anything they can to lower the value of the property in the 24 hours they are given by law to vacate the home. Everything from stealing light fixtures, cabinets, doors, and appliances, all the way up to overflowing sinks or tubs and flushing concrete down the drains. When you buy a HUD foreclosure, you get a key at closing, and then you change the locks - simple.
Inspections - Since the properties are vacant before the property is auctioned off, potential bidders are allowed to walk the property and do their own inspection before they place a bid. Not only that, but before a property is listed for auction, HUD has a third party inspector perform a limited scope inspection. This inspection tests the major systems in the house, from the electrical, plumbing, HVAC, roof, etc., and can help bidders determine how much work the property will need. HUD publishes the results of these inspections on the auction site for anyone to review. With most foreclosures sold at auction, you're relegated to looking through the windows to see the property, whereas HUD allows you access to the property and an inspection to go with it.
Financing - One of the biggest obstacles to potential buyers buying at traditional foreclosure auctions is having the cash on had. When you purchase a HUD foreclosure, you can finance the purchase. All auctions on Texas Tuesday require a cashier's check immediately after the auction, meaning you have to have all the money in cash in order to bid. With HUD, once you win the bid, it is much more like a traditional closing than an auction. You put down earnest money, and then are given time to get your financing in order. This allows buyers who don't have the entire purchase price in cash to still bid and win these properties.
Title Insurance- Finally, and perhaps most importantly, since there is a few weeks between the end of the auction and closing on the property, the winning bidder has time to get a traditional title insurance policy. This protects the buyer from any unforeseen issues with title and guarantees clear conveyance of title to any subsequent buyers. With other auctions, there are no guarantees and the only liens that are extinguished at the sale are the liens listed in the judgement. If someone along the way overlooked a lien, it would still be attached to the property and the responsibility of the new owner.
For all of the benefits HUD foreclosures offer over buying REOs from the courthouse steps, one would expect these properties to command a premium. However, after years of buying HUD houses all over Texas and participating in dozens of other foreclosure auctions, I found no noticeable difference in the prices for comparable properties from auction to auction. This Tuesday, when every real estate investor heads to the courthouse, think about checking out www.hudhomestore.com instead.