Understanding HUD-1 is Critical For the Short Sale (Foreclosure) Investor

Understanding HUD-1 is Critical For the Short Sale (Foreclosure) Investor

If you are about to work a short sale or do them on a regular basis, lenders require a offer package that normally includes a purchase contract, a letter of authorization, a hardship letter, a statement of the seller's financials, a listing agreement (maybe), and a properly completed "preliminary" HUD-1 form.

I used the word preliminary here because in the initial offer, the HUD-1 numbers are not exact (but the form needs to be accurate) and are normally the responsibility of the investor. As the deal moves through the approval process and toward a formal closing, a title company will normally produce a final HUD-1, with exact numbers.

An example of the form can be found on the HUD website.

One of the most important skills for the foreclosure investor is to be able to properly complete the HUD-1 Settlement statement. In a short sale (and "regular" real estate transactions), this form dictates who gets how much money. Period.

The HUD-1 form is under control of the Real Estate Settlement Procedures Act (RESPA). This act reads that the form is to be distributed to all parties one day prior to closing. However, some closings have very short time constraints and the final HUD-1 may be distributed shortly before the closing.

The two-page form is divided into sections, with Seller details on the right and Buyer details on the left. These sections are further divided by row numbers. We'll focus on the seller's side of the form, because that is the side that the lenders examine in a short sale.

The top part of the form is straightforward with seller name, buyer name, property address, etc.

Line 401 is the gross offer price.

Lines 504 and 505 represent the net offers to the 1st and 2nd lien holders. These two lines are the most significant in a short sale offer.

Lines 510-519 are used for pro-ration of the current year's taxes, along with noting past due taxes or HOA liens.

Lines 700-704 are use to note real estate commission charges.

Lines 1100-1113 are used to note title fees, closing processing fees, etc.

Lines 1300-1305 are for additional settlement fees.

Note that the lenders are looking for line 603 to be zero, as this is the cash to seller figure.

Since most title companies will not do numerous prelim HUD-1s on deals that do not close, it is imperative that the foreclosure investor lean how to accurately complete the HUD-1 form. It is the biggest tool used in the negotiation process.

The key point is to understand that we have to be ever more diligent on calculating the offer. Note, formulas used to calculate offers on long-term hold real estate are not at all related to fix and flip formulas, and these deals are normally disastrous for the unsuspecting investor.

We talk much more about this in the What2offer mentoring program. After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.

To Your Success,

Tom & Svein

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