In order to buy a HUD home, your offer has to meet two criteria. First, your offered price has to beat your competition. Second, your offer must meet the super-secret HUD minimum acceptable bid. In this article, I’ll be writing about determining the super-secret HUD minimum acceptable bid. (Let’s just call it the
SSHMAB minimum bid). If you haven’t done so, you might want to check out our first two articles on buying HUD homes here and here for some background.
The first criteria is easy enough to understand. The highest bid wins. I mean, HUD’s the government and all, but it isn’t stupid. So, HUD takes the highest bid net of costs, such as realtor commissions and buyer-requested closing costs, provided it’s above the minimum bid.
Why Do I Care What Bid’s Acceptable to HUD?
First, knowing the minimum bid may help you get your best deal. If you’re looking to buy a HUD home, whether you’re an investor or home buyer, you’re obviously looking for a deal. I mean there are plenty of homes out there for sale that have some advantages over HUD homes. Advantages such as heat, smoke alarms that don’t incessantly chirp for lack of working batteries, and the notable absence of big ugly Warning–This property is monitored by electronic surveillance signs. So, assuming that you’re in the price-conscious buyer category, knowing the minimum bid can help you buy a HUD property at the lowest price. While you still may have competition that may drive the price higher, HUD properties often can be purchased at the minimum bid price.
Second, knowing the minimum bid can help you quickly rule out properties that are of no interest. Depending on your area, you may have more than a few HUD homes as potential options–in some areas, quit a bit more. HUD homes, just like other listed homes, have a list price. Armed with the knowledge of the minimum bid, you’ll be able to rule out some of the properties that are overpriced even at the minimum bid.
Third, if you’re looking at HUD homes, and then offering less than the acceptable bid, you’ll be wasting your time. You can do this all day long if you like making offers, but HUD won’t accept them. This is the corollary to “HUD is government, but it isn’t stupid”. Because HUD is government, it isn’t flexible. HUD will not evaluate your offer, take a look at the property, maybe reappraise it, counter, and then negotiate. It (or at least the private companies that manage HUD properties) has a nice impersonal set of rules rigidly followed with predictable results. Well, predictable within a range.
Determining the Minimum Acceptable Bid
I would love to be able to give you the formula that, once applied to the list price for the HUD home you want to buy, will spit out the minimum bid. Unfortunately, I can’t. The reason I can’t is because (1) the minimum bid calculation is different in different states or regions and (2) it changes, albeit slowly, over time. I might be able to determine all formulas for minimum bids for all HUD regions as of today, but that would take me many, many, many hours and after I got done one or more of the areas would change.
What I can do is give you the exact formula that HUD applied to the sales of HUD homes over the time that I have been buying right up to Rob and my purchases of HUD homes as recently as the Spring of this year. I can also show you how we determined the minimum bid formula and a likely method to determine it for your area.
First, the minimum bid formula was, and is, a percentage of the list price. When I first started buying HUD homes (about 10 years ago), the rule was pretty simple–the minimum bid was 80% of list price. The formula had changed by the time that Rob and I started buying HUD homes (about 2 years ago). It also got a little more complicated. At that time, when a property first hit the HUD list, the minimum bid was 87% of list price. However, the minimum bid dropped to 80% after 60 days.
Which brings us to the second point–the minimum bid is a function of time on the market. When the housing market hit the skids, the HUD minimum bid calculation changed. By the time that Rob and I bought The Loft (click here for the name explanation), the minimum bid for HUD homes was 80% of list price when bids opened. It dropped to 70% after 30 days. There were further drops when a home went unsold for several months, but the number of these homes were so few that it was difficult to calculate exactly. I saw one home that sold at 50% of list price at around 150 days on the market.
So, will this most recent formula work to determine the minimum bid for your area? Maybe, but if not you should be able to determine the formula using this information and the published “bid statistics” for home sales. In a prior HUD article, we took a look at navigating the HUD website to find property information for your area. By navigating to the site for your home state, you’ll see an option for bid statistics. (Click on this link to see the screen shot for Colorado, for example: HUD Bid Statistics). On the HUD homes sites, the private firms managing the HUD sales provide a bid statistics category. The bid statistics page shows all bids, accepted or rejected, on each property for a two-month period. With some effort, you can use the bid statistics page to determine the minimum bid formula for the area over time. The difficulty lies in working with a sufficient number of accepted and rejected bids over months to get a good idea of the minimum bid. However, the information above, along with some patience, should get you there.
A Couple of Final Notes
While I noted that the minimum bid formula changes over time, determining the minimum bid is still likely to be a worthwhile exercise. In the 10 years that I have purchased HUD properties, the minimum bid formula for my area has changed only three times.
Also, you should be aware that when I’ve referred to a formula as a percentage of list price, I am referring to the original list price. After a period of time on the market, HUD will lower the list price, but the lowered price does not seem to correlate with the lowering of the minimum bid. So, in one instance, the list price may not be lowered when the minimum bid has been and vice versa.
In addition, I discovered fairly recently that the management company seems to have some discretion in determining the minimum bid. I came to this conclusion because the minimum bid changed once again after Rob and I bought The Loft, which corresponded with a change in the management company. The minimum bid percentage increased. The increase certainly did not seem to be justified by market conditions. The only thing that had changed was the management company. Given that, I also suspect that the minimum bid calculations when we bought the Loft are likely to be duplicated in other regions where the same management company continues to handle HUD sales. If you want to know to which company I’m referring, drop me an e-mail, and I’ll be happy to pass along the information.
Finally, just because the bid’s acceptable to HUD, doesn’t mean it should be acceptable to you. You’ll need to still make your own determination of value. I’ve found several HUD homes that met my criteria. With the knowledge of HUD’s minimum bid, sometimes I’ve been able to buy homes that meet my criteria and then some.