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HUD-1 is Critical For Short Sales

March 28th, 2011

If you’re going to work a short sale or do on a regular basis, lenders require a package deal that includes a rule the purchase agreement, a letter of authorization, a hardship letter, a statement of the financial statements of the seller, a listing contract (maybe), and a complete “preliminary” HUD-1 form.

I used the word here because the original offer preliminary, the HUD-1 numbers are not accurate (but the form needs to be precise) and are normally the responsibility of investors. As the business moves through the approval process and towards a formal closing, a title company normally produce a final HUD-1, with exact numbers.

A sample form can be found on the HUD website.

One of the most important skills for the foreclosure investor must be able to successfully complete the HUD-1 settlement statement. In a short sale (and “normal” real estate transactions), this form dictates who gets the amount of money. Period.

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

The two-page form is divided into sections, with details on the right Seller and Buyer details on the left. These sections are further broken down by line number. We’ll focus on the seller’s form, because this is the side that lenders consider a short sale.

The top of the module is simple with the name of the seller, the buyer’s name, address of property, etc.

Line 401 is the gross offering price.

The lines 504 and 505 represent the net offers the first and 2nd lien holders. These two lines are the most important in the provision of short sale.

Lines 510-519 are used to pro-ration of taxes for the current year, along with note past due taxes or liens Hoa.

Lines 700-704 are to note the use of real estate commission fees.

Lines 1100-1113 are used for expense account title, closing expenses, etc.

Lines 1300-1305 are for the additional settlement fees.

Note that the lenders are looking for line 603 to zero, as this is the case of understanding seller.

Since most title companies will not make many prelim HUD-1 on deals that do not close, it is imperative that the investor foreclosure lean as carefully fill the form HUD-1. It ‘s the greatest instrument used in the process of negotiation.

The key is to understand that we must be ever more diligent in calculating the bid. Note, the formulas used to calculate expected long-term deals in real estate are not related to fix and flip formulas, and these deals are usually disastrous to unsuspecting investors.

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