This post is an attempt to understand, not to lecture. Allow me to set the stage for you. In our firm, transactions involving HUD foreclosures account for a third of our volume for the past couple of years. Considering the deals that were available in this corner of the market, it was always a viable option for our investor clients looking for homes below market value. But this year, change is in the air. For one thing, homeowners are bidding on these foreclosures more often and winning these bids since they don’t require investor-like discounts and HUD likes to promote home ownership. But most importantly, now more than ever, we’re noticing that a dominant majority of properties are going for asking price or more. Sometimes, much more.
The Research
To make sure that I wasn’t extrapolating data from a few deals into a conclusion with rather serious consequences, I decided to dig deeper and substantiate my hunch with hard numbers. During the period from Jan 1st – Jul 1st 2008, there were a total of 207 HUD properties sold in Harris County, 49% of which sold at or over asking price. During the same period in 2009, there were a total of 128 solds, 69% of which sold at or over asking price. That’s a 40% jump without even counting the 75 properties currently pending that didn’t make it into the analysis.
Puzzle Pieces
Why does this matter and where does the housing stimulus enter into this? The numbers I presented above were sales figures in the $90,000 to $130,000 price range. My mortgage pros will probably back me up when I say that wide majority of these transactions involve FHA financing. When you purchase a HUD Home with FHA financing and bid higher than the asking price, the Buyer has to make up the difference in cash since the lender is obligated to use the HUD appraisal. What we’re seeing on the trenches, are bids higher than asking by 7, 8, 10 thousand dollars. Most buyers that use FHA financing do so for its lax down payment requirements since they don’t possess conventional type money to put down . Which brings up the question: Where are these buyers coming up with this money to close these transactions? My theory is that first time homebuyer tax credit money is being used to cover the difference.
Questions
- Is the jump in “at or over asking” solds due to competitive environment or overzealous agents pushing clients into higher bids?
- If the second option is true, does this constitute a breach of fiduciary duty by these agents?
- If first time homebuyer tax credit is being spent for this purpose, is it worth the expense?
- Are you seeing similar trends in other parts of the country or is this a local Houston issue?
I would love your input in the comments.
