HUD and VA REO Properties: Why You Should Never Invest In One

Thinking about buying a US Government REO Property?  You better think twice!  Thought that you would invest in a bulk portfolio and eventually tap the bond market?  Yeah, when your renters begin to sue you this article is going to be your long overdue wake up call!  Over the past several months we have been breaking article after article about how both the United States Department of Housing and Urban Development (HUD) and the United States Department of Veterans Affairs (VA) appear to be doing their best to attach every bit of legal liability to the properties that they possess for resale.  In fact, multiple liens are currently being contemplated by a group of African Americans in the Southeast.  HUD and VA’s response?  Nothing.  It strikes one that HUD and VA want to ensure that there is a Pandora’s Box of litigation waiting for Consumers stupid enough to buy their Properties.

Taxpayers need to remember that there are TRILLIONS of dollars of taxpayer money at stake here when you factor in both the Contracts awarded to Prime Vendors (many times without Fair Competition For Bidding) and the valuation of the homes themselves.

Time after time after time the HUD and VA Offices of the Inspector General uncover problems with how their own agencies handle these properties.  We are not just talking about squandering money either.  I cannot begin to count how many homes are contaminated with Black Mold — the Black Mold that kills you if you are lucky not to spend years dying a slow and miserable death — and the Prime Vendors instruct Contractors to “… spray the mold with bleach and apply Kilz …” to make the visible problem go away.  To date, I have never witnessed nor obtained any documents wherein HUD or VA has authorized a licensed Mold Remediation Firm to come in and tent the home and property remove the life threatening contamination.  Want a real scary thought,

Mold, while concerning, is nothing in comparison to the toxic brews left behind by the meth labs.  There are currently no mandatory laws dealing with this situation.  To date, I have NEVER seen a methamphetamine remediation.  How HUD and the conveyance to HUD works is that an Addendum is entered stipulating that all Properties as “As-Is.”  Several brokers I spoke with stated that “… it doesn’t matter if I tell them that there was a law enforcement or DEA sign, it never tracks along with the property.”  Another broker stated he would tell a Client in the Report if he witnessed it, but that apparently is not HUD nor VA Protocol to inform potential buyers unless there was an official Remediation.

With respect to official guidance, Washington has always left the decision making process up to the local HOC.  Chip Allen, Crestline Mortgage Bankers had a lot of input about the meth situation,

After confirming with two separate sources at the Denver HOC office, we have learned any home, including HUD Repos, which have any evidence of the use of meth or creation of meth or even if a police report has been issued stating meth was in use in a home is ineligible for FHA insurance. Even if remediation has been done, they will not accept the property [Emphasis added by Allen].  The appraiser is to reject the property if they have knowledge of meth use or creation in the home or if they have been informed of remediation. It is important to know that HUD Washington has not issued anything in writing but has left this particular issue up to the individual Homeownership Centers. The Denver HOC has decided they will NOT accept properties impacted by meth until further notice, although this is not in writing either but is an internal order. Please keep in mind the Denver HOC has authority over 17 western states and this order applies to all the states reporting to the Denver HOC. Please make sure your Real Estate agents are aware of this as well. We have not received any notification from any of our investors regarding this issue, but if the loans cannot be insured, they will not be purchased.

Meth and mold contaminated properties are usually encountered when buying REO (real estate owned) or bank owned properties.  Typically, banks don’t provide disclosures or the disclosures are AS-IS, meaning that the bank is either “playing dumb” or disclaiming all knowledge (thus responsibility) for any and all problems or issues.

Even if the property has been remediated to current state standards, FHA loans will be nearly impossible to be used to purchase a current meth property or a previously contaminated meth property.

Diana, FHA Customer Service Representative, couldn’t or wouldn’t give me a direct answer as to whether or not the Federal Housing Administration (FHA) would insure a lender’s note with specificity to a property being contaminated by mold or methamphetamine.  (SR 2013-7709241)

FHA Customer Service Representative Diana referred me to Brian Sullivan, HUD Public Affairs Supervisor when I inquired to whether or not FHA would insure on lender’s notes against properties contaminated with mold or methamphetamine.  Mr. Sullivan requested that I send my questions, in writing, to him.

At the end of the day the Consumer looses out, across the board, from the purchase of HUD and VA REO properties.  Why?  First, as both HUD and VA refuse to investigate the numerous Claims ranging from felons hired to outsource work and payment of Contractors for services rendered, each and every property is now suspect; they are all ripe for litigation.  Second, we all know the great care and concern HUD and VA have towards Consumers.  Hell, the VA puts their own war veterans in deteriorating and mold ridden housing and medical centers while HUD ensures that outfits with Exceptions For Convict Labor (PK Management Group) are awarded Contracts.  Do you really, for a single moment, believe that HUD and VA are going to be forthcoming on the methamphetamine Addendums?  I do not.

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