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How to Buy Real Estate for 1/2 Price

by J.P. Vaughan   

I have purchased many houses for a 40% to 60% discount. In a recent four-month period, I purchased three houses for a 40% discount and four houses for less than half price. If you will take a little time to learn what to do, you too can cash in on this unique situation.

Where to find the best bargains

As far as I know, there's only one place where you can regularly purchase a house for half price: at the government's HUD auctions. The last recession and plummeting real estate prices in some areas have created the largest inventory of HUD houses in many years.

For example, the Santa Ana, California HUD office is currently taking back over four hundred houses per month. They expect this rate to continue throughout most of 1996. And this office is only one of 81 HUD offices throughout the U.S. and Caribbean.

Many HUD auction houses sell for at least 20% less than market value. Quite a few sell for a 25% to 40% discount. Several will sell for half price or less. Most auction houses sell for a 20% to 40% discount.

Obviously, if you are happy with a 20% to 40% discount, you will have a much larger selection of houses to choose from than if you are holding out for half price. Even so, with a little patience and "know-how" you can buy a house for half price or less. I've done it many times.

Vision is the first key to success

HUD auctions reward the buyer who has vision. The best bargains are usually on houses that need some fix-up, houses the average home buyer may not want. Most home buyers want to own the nicest house on the block and simply don't have the vision to see potential behind the dirt and grime.

To a serious bargain hunter, however, the nicest house on the block is the one you can buy for half price. New carpet and paint, a little grass seed, and a few flowers can transform a dump into a doll house and double its value. A little vision can go a long way toward buying a bargain property.

Flexibility is the second key to success

If you really want to purchase a super bargain at the auction, you cannot go into the auction arena with any preconceived notions. Flexibility produces opportunities. Most of the other bidders overlook these opportunities because they have adopted certain attitudes that are carved in stone.

For instance, most of the other bidders will not even consider bidding on the "uninsured" auction houses. Let me explain. HUD lists its auction houses for sale as either "insured" or "uninsured." This designation refers to whether the FHA will provide mortgage insurance on the house again.

Insured houses

If the HUD auction listing states the house is "insured," that means the purchase may be financed with an insured FHA mortgage. However, to qualify for FHA financing, the house must comply with strict FHA standards. FHA standards cover everything from roofs, to carpet, to doorknobs.

In order to comply with these standards, an "insured" house usually does not need very much fix up. Therefore, the winning bid is usually high, and the top bidder is usually someone who wants to buy the prettiest house on the block.

However, "usually" does not mean "always." The astute HUD auction bidder always looks for an exception to the rule. At almost every auction, a well-prepared bidder can cash in on at least one such exception. Several houses will simply "fall between the cracks."

For some inexplicable reason, the auction crowd overlooks certain houses. There just isn't any bidding interest in them, and they "fall between the cracks." Of course, you never know ahead of time which houses those will be. So bidders who check out all the houses and prepare to bid on all the properties will be ready for action when this opportunity presents itself.

We recently purchased an insured house like that for $47,000. It has four bedrooms, two baths, and a family room with a fireplace. This is a house that simply "fell between the cracks." After about $3,000 in cosmetic fix-up, the house will be worth $90,000.

Uninsured houses

We often joke with other auction buyers that HUD has no rhyme or reason for how or why it lists a house as insured or uninsured. Sometimes we just can't figure it out. Usually, though, you will find the best opportunities on the houses listed as "uninsured."

An "uninsured" house cannot be financed with an FHA mortgage because it needs too much fix-up to comply with FHA standards, or because it has been for sale on the open market for too long, or for some other reason known only to HUD.

The house might need only carpet and paint, or it might be a total dump. We recently purchased an uninsured three bedroom, two bath house on two and one-half acres for a total price of $23,000. It was perfect except it needed carpeting, interior paint and two medicine cabinets for the bathrooms (at a cost of $19 each). It's worth about $59,000 fixed up. Why was it "uninsured"? Beats me.

Most bidders at HUD auctions do not bid on the uninsured houses because they believe they must either obtain a conventional mortgage, which requires a 20% down payment, or be prepared to pay all cash within thirty days of the sale. They believe they cannot obtain good bank financing for the purchase. They are wrong.

There are many ways to purchase auction houses with no money down and without bank financing. But that is a topic for another day. . .


About the Author:

j.p. vaughanJ. P. Vaughan was the co-founder and Publisher of Creative Real Estate Online. She wrote the book How to Buy Your Dream House for 1/2 Price (Quantum Publications 1994, out of print). J.P. was also an attorney who practiced law in Michigan until she started investing in real estate full time in 1988.

J.P. passed away in October 2015 after a long battle with ovarian cancer.


 
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