In 1986, the U.S. Department of Housing and Urban Development, more popularly known as HUD, was established to manage federal housing and community development programs. In order to organize tasks, HUD incorporated various housing agencies to perform administrative tasks for them. One of these HUD agencies was the FHA (Federal Housing Administration), which has been commonly known as HUD/FHA since 1971.
Both FHA and HUD programs act as an insurance agency for mortgage bankers, savings & loans, banks and other investors who offer real estate loan to buyers. While the HUD/FHA does not make the loan directly, they insure the lender against loss in cases of default. As such, if you applied for a real estate loan through an HUD/FHA lender and they accept your application, the agency gives you the money. The agency will then give the lender an insurance policy assuring protection of its financial interest.
HUD properties are publicly sold when any HUD/FHA mortgages are foreclosed. Once HUD pays the amount of the loan due plus other expenses to the lender, the agency can now resell the property.
When you make a loan in any of the banks, authorized lenders or savings & loan institutions, that same lender has the right to start a foreclosure action on your property once you fail to make the monthly payments. Upon the completion of the foreclosure process, the lender will give the insurance policy back to HUD, including foreclosure expenses, legal reimbursement fees and accumulated interest. HUD will reimburse the lender and the property will belong to the HUD agency. They can now sell or dispose the repossessed home in any manner they feel reasonable.
Once HUD gets the repo home back, the agency turns it over to the Property Disposition Department, which ensures that the property is free from damage and vandalism. This department will also decide is the repossessed home will be sold directly to public investors or through brokers.
If HUD decides to use a broker, the broker is responsible in repairing the property, securing the repo home from damages, advertising the sale, accepting bids, controlling escrow accounts and making sure that the deal closes. For these responsibilities, HUD will give the broker a 6% commission, whether HUD sold it directly or the broker found a buyer himself.
HUD allows real estate agents and HUD authorized brokers to acquire the agency’s repossessed homes. HUD brokers have a clear advantage over the local real estate agents because brokers receive the list of HUD repo homes before the public does. Meaning, HUD brokers can easily prevent other investors from accessing the property. Unfortunately, the only way you can purchase a HUD property is through a registered HUD broker and other agents authorized to sell HUD homes because they are the only ones allowed to submit offers and close deals.