Investing Outside of Wall Street – My first bid on a HUD property

** On 02/01/2016, this post was updated. I thank Ms. Amy Beltz of BLB Resources for her valuable input.  On 01/28/2016, I took the class she taught on “Comprehensive HUD Training.” **

HUD is short for U.S. Department of Housing and Urban Development.  A HUD home includes a 1-to-4 unit residential property, condos, and townhouses acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage.  HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim.

For those of you who prefer to simply find out the bare minimum of what you need to know BEFORE placing a bid on a HUD property, you are welcome to go to the last two sections of this post: “Before placing a bid” and “Upon acceptance of your bid…”  For the rest of you, here is the juicy detail of my first-time experience.

For any and all human activities and experiences, there is always the first time.  In late 2015, almost immediately after becoming licensed as a real-estate broker, I also became eligible to place bids on HUD properties for myself as well as others through HUD’s bidding platform.  In recent years, having become focused on wholesaling real estate, my objective has been to buy low and sell low.  With solid cash buyers relying on us to find great deals for them, going after HUD properties has become a part of the natural progression of events.

Not so incidentally, I have always been interested in HUD properties for our own investments as well.  I never took the time, however, to seriously go after them because it seemed so complicated.  All of the real-estate gurus tell you to hire someone else to place the bids for you.  Well, in order to do so, I would still have had to take the time to find a reliable, licensed and registered individual, who could get the job done on our behalf, someone who is hungry to do a good job for us on a timely basis.  On top of it, I have learned over the years that delegating a task – or partnering with someone on real-estate deals – without fully understanding the process myself FIRST is a recipe for a potential disaster down the road.

At a future point in time when I will have had some successful bids under my belt, I may choose to hire someone else.  But, for now, here it is.

Thursday, December 31, 2015, I placed a bid on a HUD property for one of our clients.  The original list price was $80,000, and it had just been reduced by 10% to $72,000.  The client wanted me to bid $57,000.  So I did.  Then came my first experience in receiving a rejection notice from HUD.

Monday, January 4, 2016, Happy New Year!  I received a “HUD – Bid Counter Offer Notice,” which indicated that the minimum-acceptable-net-to-HUD offer amount for this property was 59,040.  Because it said, “net,” I calculated the price at which HUD must want us to bid, adding back nearly 10% that it would be responsible for to get to the closing table.  And I suggested this number to our client.

Tuesday, January 5, 2016, my client chose to add only $5,000 to his original bid amount.  So this time, the bid was placed at $62,000.  I was fully expecting another rejection notice.

Wednesday, January 6, 2016, an acceptance email from HUD came into my inbox at 3:10 p.m., followed by an Investor Package and Broker Instructions at 3:30 p.m. from the asset-management company handling this case.  I saw these emails at 5:24 p.m.  At that point, I became simultaneously elated (about the very first HUD acceptance notice!) and scared (about what all I had to get done next).

I was already working on other deals, completely independent of HUD.  I also had a commitment with a coach every single weekday for the first two weeks in January, involving listening in and doing homework each day.  And it is the type of homework which requires some serious thinking on my part.

HUD allocates only two business days to RECEIVE from the HUD-registered selling broker/agent the completed package of what it needs.  This meant most of the next day – outside of the existing deals and the coaching program – had to be devoted to figuring out the details and putting together the package so that I could “overnight” it back to the asset-management company that was processing bids on HUD’s behalf.  I needed to get it done BEFORE the main post office closed.  Aye yai yai yai yai!

I was unable to start tackling the HUD package until late afternoon.  Once I started working on it, I called the asset-management company numerous times, asking for clarification for each of the items I needed to complete.  The young lady assigned to our case knew what kind of time constraint in which I found myself.  She was very helpful and put me at ease by indicating that, if I needed an extension, just let her know and email her the tracking number of the package being mailed back.  She also indicated that if the package were not complete, others assigned to our case would be sending us a list of additional/missing items to be submitted at a later time.  In other words, if the package is not 100% complete, it is not the end of the world.  Coming from the corporate world, however, and especially having been a student of Toyota’s system, I believe in doing everything right the first time – at least to the best of my knowledge – so as not to waste time or money on anyone’s part within the process chain.

Wednesday night, the package was far from being ready.  I kept working on it very late into the night.

Thursday, January 7, 2016, except for the coaching program, I was able to rearrange my schedule and devote most of the time to preparing the HUD package.  I still had a lot of questions.  After 4:30 p.m., however, the young lady was no longer answering the phone.  I kept combing through the HUD instructions and the package one last time until I knew that there was no stone unturned.  I created a list of all of the remaining questions.  Before going to bed, exhausted, I had the entire package ready to be signed by the client – although he and I still had some crucial questions that needed to be answered.

I texted my client, “I found a cancellation form ready to be signed by both of us – just in case.”  I wanted to make sure that my client was in the driver’s seat, and that I was ready to assist him regardless of which way he ultimately chose to go at the last minute.

We both remained concerned about possibly (1) him losing his earnest-money deposit (EMD) of $1,000 if we were to proceed and (2) both of us – him as a buyer and me as a HUD-registered selling broker/agent – ending up with a bruised reputation in the eyes of the HUD by cancelling the first bid AFTER the bid acceptance.

With this background, he and I agreed to meet the next morning at a bank, where both of us happened to have accounts, as soon as it opened at 9 a.m.  This way, he could have the bank issue a certified check in case he chose to move ahead with the property.

Friday, January 8, 2016, at 8 a.m., I was able to get all of the questions answered by the young lady at the asset-management company before heading out to the bank.  She answered:

1. No, you are not going to be penalized for having to cancel the bid.
2. If your client were to proceed, send in the EMD check (to the listing broker through the selling broker) and the investor package (to the asset-management company, also through the selling broker), and decide to change his mind thereafter, then he would be putting himself at risk of forfeiting the $1,000 deposit.

By the time we met and began talking at the bank at 9 a.m., we were both in agreement that, “Yes, we should cancel it.”  I was relieved that my client came to that conclusion himself BEFORE putting his $1,000 EMD at risk.

Now that I know what is expected of me as a HUD-registered selling broker/agent and what steps are involved, I am much more confident about placing future bids, whether for our clients or for mysel.

Note: By law, those who are HUD-listing brokers, or anyone related to them, cannot bid on HUD properties. Therefore, I have no desire to become one.  As a selling broker, on the other hand, I can. In fact, a few years ago, I decided to eventually learn to place my own bids for this very reason.  At that time, I did not think that I would be doing this for others. Useful skills that remain in demand are good to have when the economy threatens your livelihood.

BEFORE placing a bid:

What follows is a list of the bare minimum you need to know:

1. All HUD properties are sold “as is.” Therefore:
   1. It is imperative that the buyer review the Property Condition Report. The PCR, however, is not a warranty.
   2. NEVER bid on a property without having seen it first.
      1. Do NOT make blind offers unless you already know the property condition intimately.
   3. Any inspection you get done professionally prior to placing a bid is good only for:
      1. Estimating the repair cost.
      2. As proof of prior condition, under which the decision to bid was made, in the event it will have changed within 48 hours prior to closing. For example, a furnace was there when inspected; within 48 hours prior to closing, however, it is missing.
   4. Check with the municipality (city, township, etc.) regarding any special assessments for which the property buyer will be responsible.

What your HUD-registered selling broker/agent must have from you – per HUD requirements – in order to place a bid on your behalf.  Clearly, because of the sensitive pieces of information, it is your responsibility – as a buyer – to choose a HUD-registered selling broker/agent whom you know and trust:

1. An earnest-money-deposit (EMD) in a certified check:
   • $500 when the sale price is $50,000 or less.
   • $1,000 when the sale price is $50,001 or more.
2. Your buying entity’s name.
   • OR your personal name.
3. Your entity’s Employer Identification Number (EIN).
   • OR your Social Security Number.
4. Address of your entity.
   • OR your home address.
5. Your preferred email address.
6. Your phone number; mobile preferred.
7. Cash-offer amount.
8. Inspection period.  (Customarily 7 days.)
9. Your preferred title company.
10. (A selling broker/agent may choose to create a form for himself/herself to be signed by the buyer.) A list of rules to which a buyer must agree and sign with respect to HUD properties BEFORE closing on the property.  These rules include:
    • Do NOT occupy the property.
    • Do NOT change any locks.
    • Do NOT make any improvements, repairs, or landscape modifications.
    • Do NOT  store personal property on the premises.
11. (A selling broker/agent may choose to create a form for himself/herself, clarifying to the buyer that “this was explained to you by your agent.”) If you are an owner occupant, you must agree and sign the form that indicates that you agree to live there for a minimum of 12 months.  Thereafter, you are eligible to bid on another HUD property AFTER 24 months of occupancy.
    • If you are an investor (i.e., NOT an owner occupant) – and make any false statement about this requirement, it is considered a federal offense.  Your fine will be $250,000 or two years in prison.  In short, “Don’t do it!”

UPON ACCEPTANCE of your bid, an investor package must be received by the asset-management company within 48 hours:

Note: If you are an owner occupant (not an investor), the following contents may vary slightly.

1. For cash buyers, proof of funds – to be submitted with the package – must be from a banking institution that the buyer uses, bearing the buyer’s name.
   1. The more recent the statement, the better; and no older than 30 days.
   2. No proof of funds from anyone else will be accepted unless gifted to the buyer PRIOR to placing the bid.
2. The next statement regarding an EMD could vary from one state to another and from one asset-management company to another.  In this particular case in Michigan, an EMD had to be in the form of a certified check (bank’s policy), made out to the local listing-brokerage firm (asset-management company’s policy), including its specific address.
   1. It is the selling broker’s responsibility to see to it that the certified check is received by the listing broker in a timely manner.
      1. Personally, I will likely deliver the original check to the listing broker the day the buyer hands me the EMD check. Therefore, I expect to get this process done earlier in the day.
   2. The investor package must be signed by the buyer and the NAID-registered selling broker (me) using blue ink.
      1. A copy of the certified check (EMD) must be included in the package.
      2. The original document must be received by the asset-management company.  Some asset-management companies may require additional copies of the entire package.  Check with your asset-management company for clarification.
         • One additional copy must be kept by me, the bidder. (Note to self: With my very first bid, I needed to make a total of three sets of copies; i.e., two additional ones for the asset-management company; one for me.)
      3. Lastly but perhaps most importantly, while it is the registered bidder’s responsibility to put together the package, it is highly recommended that each HUD-property buyer review – at least once – both the “Investor Sales Package” and “Broker’s Guide to selling HUD Homes.” These documents contain crucial pieces of information any cash-investor buyer needs to know.
         • The actual documents I received are not attached to this post because (1) they are specific solely to Michigan HUD properties and (2) there may be slight differences between different asset-management companies.
         • If you are our existing clients who already signed a Wholesale Buyer Agreement with us, these documents will be provided to you upon request.

At some point in the future, when I will have actually closed on some HUD properties,  I may write a sequel to this post.

Happy investing!