What is the Difference Between a Bank-Owned Property and a HUD Home?

Foreclosures hit a record high in the third quarter of 2009.

The housing market is inundated with homes in foreclosure. According to the RealtyTrac U.S. Foreclosure Market Report, foreclosures nationwide hit a record high at the end of the third quarter, 2009. Many of these homes are bought back by the banks that initially financed them or the U.S Department of Housing and Urban Development (HUD) and put back on the market. You may not get a steal by buying one of these houses, but if you do your homework thoroughly, you may get a home for a better-than-average price.

Definitions

A HUD home is an FHA-insured and mortgaged single-family or multifamily home that has gone into foreclosure and is bought by HUD. The HUD-owned property is handled by a management company under contract with HUD to recover the loss on the foreclosure claim. Any single family property acquired by HUD is appraised and title issues are resolved.
A bank-owned property, also called real estate owned or REO, is also a single-family or multifamily home that failed to sell at foreclose auction and reverts back to the bank. Since the bank owns the property, the mortgage loan no longer exists.

Similarities

HUD-owned and bank-owned homes look the same.

REO properties and HUD homes are the result of foreclosures. Both types of homes can be listed into the Multiple Listing Service (MLS) and posted on Internet sites. Both organizations do not provide financing. Buyers have to have either cash or find a mortgage lender to purchase one of these homes. REO or HUD homes are offered at fair market value in "as is" condition, based on a recent appraisal. They do not do repairs to make the property "presentable." A real estate agent either representing the bank or HUD makes the buying offer on your behalf. There are never face-to-face negotiations.

Differences

You can only purchase a HUD home through an agency that is under contract with HUD, and even though a HUD property can be listed into MLS, the sales transaction can only be handled by a real estate broker registered with HUD through an Internet site maintained by a management company under contract with HUD. HUD houses are offered first to primary owners during an "offer period." Afterward, if a buyer has not qualified, investors may bid on the property and the property goes to the highest bidder. A HUD-owned home buyer must live in the house for one year, and the homeowner may not buy another HUD home for two years.
Bank-owned homes are often handled by a loss mitigation department within a bank. Their job really isn't about selling properties, it's more about minimizing losses caused by loans that have defaulted. The difficulty in buying a bank-owned property is finding the person who can make the decision to sell the bank-owned REO property. Each bank has its own rules and requirements on how it sells bank-owned REO properties.

Benefits of Buying a HUD-owned Home

HUD pays the real estate agent's commission, as well as closing costs with certain guidelines. In certain situations, HUD will allow the buyer to close with only a $100 down payment. HUD offers several programs that can help a buyer. Two such programs are Dollar Homes initiative and FHA 203(k) Rehabilitation loans. The Dollar Homes initiative partners with local governments to offer low- to moderate-income families the opportunity to purchase qualified HUD-owned homes for $1 each. The 203(k) Rehabilitation loan helps a homebuyer to make repairs on the home. Instead of several different high-interest loans to purchase the home and do repairs, the borrower can get just one mortgage loan to finance everything.
HUD also has a discount sales program in which people displaced by Hurricane Katrina, Rita or Wilma may be eligible to purchase a HUD home at a discount.

Benefits of Buying a Bank-owned Home

Bank-owned properties are usually sold at below-market prices with low down payments and low interest rates. Also, the bank has done the work of clearing any liens or claims on the property, as well as any second or third mortgages, and past due taxes. If you have done your homework to understand how to buy a bank-owned home, you may be able to negotiate the purchase price as well as lending terms and closing costs.

Warnings

Both the banks and HUD do not warrant the condition of their properties and will not pay for the correction of defects or repairs. If you are interested in a bank-owned or HUD-owned home, you should get a professional inspection prior to submitting an offer to purchase.
When making an offer on a bank-owned home, the bank generally presents a "counter-offer" in an effort to get the highest price possible. You will have to offer a counter-offer, which is subject to review by the banking corporation for approval.

References

• Real Estate ABC: Buying Bank-Owned Properties (REO)
• Realty Trac: Foreclosure Activity Hits Record High In Third Quarter
• HUD.gov: Buying HUD Homes

Resources

• US Department of Housing and Urban Development
• The Right Solution at the Right Time
• A Better Way to Buy Your Home