The process for HUD acquisition is slightly different than if you were to buy an REO or other foreclosed property. Since you are buying from the government, as expected, there is more red tape and the process is drawn out. Typically, a closing can last anywhere between 30 days and 90 days. Three months is a very long time to wait for a property, so if you are buying a HUD home for investment purposes, plan on doing deals in the interim while you are waiting for the paperwork to be processed. The closing time period tends to be shorter with all-cash purchases, but if a mortgage is involved you can bet that it will take at least 45 days to close.

Once a HUD property comes on the market, there is a specific window where only people with the intent to live in the property can bid. These people are known as OWNER OCCUPIED buyers. If the property is not sold, it is then opened to investors. Buying a property as an investor and claiming you are an owner occupied buyer is a felony, which carries severe penalties and HUD will prosecute you, so just take a deep breath and be patient. If you’re worried that all the great deals will be gone by the time you get a chance to bid, you need to expand your conception of ‘great deals.’ Homeowners will likely buy the houses that are habitable as-is, because they lack the experience and knowledge to do rehab If you look for properties that require more effort than the average homeowner is willing to make, then that property will likely be available when the owner occupant-only window ends.

HUD properties are listed on the MLS as well as the government website www.hud.gov. There is no particular reason to choose a HUD home over an REO home, but if the property you happen to be interested in is a HUD home, you will have to go through a unique process. You have to hire a realtor to put in your information into the HUD website—it is impossible to do it yourself. HUD will pay around a 6% fee to the winning real estate agent. There is a potential for conflict of interest: your agent may want you to raise the bid even if the value of the property doesn’t merit a higher bid. Secondly, the agent may work for multiple bidders, and so after you place a bid, the agent may tell their other client to bid higher. If you find your real estate agent pushing for a higher bid, beware, and use your judgment to make the decision.

HUD allows great opportunities for rehab and resale or rental. Additionally, the requirement that inspections be performed before bidding, even though you many not win the bid, discourages many first-time homeowners who are afraid of assuming the risks. Investors may find the best HUD deals in areas where the HUD properties are accumulating, since HUD is looking to move the properties quickly. To incentivize buyers, HUD may further discount properties, turning a good deal into a great one. Keep looking at the MLS and www.hud.gov, and you’ll find the properties that will make you money.

Before you step foot in that tax auction, there is a substantial amount of preparation necessary in order to ensure that you do not overpay nor receive a worthless tax lien.  Firstly, you must inspect the properties.  Secondly, you must research the rules for the tax lien process.  Thirdly, you must determine the absolute maximum you are willing to buy the certificate for.  Tax liens are a low risk investment, but if you think that means ‘a no work investment,’ you could easily find yourself wasting money.

1.  Property Inspection

Prior to auction, you have a period of time after the list of tax lien properties is published to inspect the properties.  Use this time to your advantage!  This list can range anywhere from a handful of properties to thousands, so look at the liens carefully and narrow them down by price and location.  Some of the properties are going to be redeemed before the auction, so pick a good number so that some of the ones you have researched will be up for sale.  Research can involve anything from driving by the property to external inspections to title searching.   The majority of these properties will be reclaimed, so it is a good idea to avoid spending a lot of money on research. The goal is to get a general idea of how much the property is worth so you know your upper bidding limit for the lien certificate.

2.  Learn the Rules

Every state has different rules and procedures for tax lien certificates, so it is imperative that you learn the details carefully or you could be disqualified from the auction or redeeming a property.  For example, some counties require a deposit to attend the tax auction at least thirty days in advance.  It would be unfortunate to do all your research and then find out that you can’t get in the auction.  Some counties require you to notify the homebuyer that you have bought the lien, and unless this is done in a timely matter, you will be disqualified from suing for the quiet title.  Other counties calculate the return differently depending on the overbid, and knowing those rules is important for you to decide your maximum bid amount on the tax lien.

3.  Determine Your Limit

The opening bid for the tax lien is what is owed to the state plus an advertising expense and any special assessments, but you could end up paying many more times that due to the competitive nature of the auction. All counties in the State of Indiana impose a penalty on the overbid, the difference between the successful bid price and the minimum bid is known as tax sale overbid – 10% per annum interest from the date of payment to the date of redemption.  If the tax lien was worth $4,000 but sold for $24,000, the interest would be the penalty fee for $4,000, which is 10% if the property is redeemed in the first six months and 15% if the property is redeemed in the second six months, plus the 10% on the $20,000 overbid.  This means that at the end of the year, you could have a return of $2,600. In a state like this, it is to your advantage to bid more.  Knowing the exact calculations for return can help guide you in how much you should be willing to spend on a tax lien.  For more information, visit www.practicallyfreehouses.com, RF Tax Lien Investment’s website, a company that specializes in tax liens and can help you on your endeavors.

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