The U.S Housing and Urban Development offers a program that allows teachers, firefighters, law enforcement officers (police, prison guards, border patrol, etc.), and emergency medical technicians to purchase a foreclosed house from HUD for 50% off the list price. Called the Good Neighbor Next Door program, the way it works is that members of these groups can buy the home for half of the list price, obtain a first mortgage for 50% of the list price and receive a “silent second” mortgage from HUD for the other 50%. After 3 years, the loan is forgiven. For someone who is willing to put up with all the rules and risks of the program, they can live in the home for 3 years, then sell the home (or refinance if they want to stay in the home), and cash in on a large profit on the purchase.
Let’s talk about the rules and risks of the program. The first issues is that you have to be an employed teacher, law enforcement officer, etc. at the time of the purchase. Obviously this filters out a large portion of the program. Keep in mind that you can still quit your job during the 3 years. You have to sign something stating that you intend to remain employed in that field from one year after closing. As long as that is your intent, you are qualified. If your school district lays you off or some unforeseen circumstance happens to you, you can still keep the home and your silent second will still be forgiven as long as you remain in the house for 3 years.
The other big one that is fact that not all HUD-foreclosed homes are eligible to be purchased with the Good Neighbor Next Door program. They have to be located in designated revitalization areas. Some of those will be very bad neighborhoods that aren’t going to attract many buyers. The best way to approach this program from an investment standpoint is to buy the most expensive home you can afford in an area that you feel is acceptable to live in. You don’t want to buy a $20,000 house for $10,000 in a neighborhood where you are scared to go at night and where the home values have a high risk of depreciating. The discount isn’t as good and the risk is very high (both to your personal safety and the home as an investment). However, if you can find a $150,000 house in a decent neighborhood, you could be hitting a home run when the silent second disappears and you might have $70,000 in new equity (if the homes value holds up) and perhaps even some appreciation.
The residency requirement is a big deal. This is the government you are dealing with so the last thing you want to do is lie about that and end up in criminal hot water. HUD is allowed to periodically check to make sure the home is your primary residence. The home needs to be your primary residence and you can’t own other houses. However, that does not mean you have to sleep there each and every night. There are young teachers or firefighters that sometimes stay at their parents’ house or with a boyfriend or girlfriend. As long as the house remains their primary residence for 3 years, they will be fine. Also, you can move out and change the house from your primary residence to a rental property after 3 years, although you may be better selling and taking advantage of the $250,000 tax exclusion (or $500,000 for spouses filing jointly).
Another thing to think about is that the homes themselves are HUD foreclosures and they are sold as-is and at list price (with the silent second giving you the 50% discount). They will generally require some work, so you might need to obtain an FHA 203(k) mortgage to cover repairs, or put extra money aside. It is possible that the same home might sell for a few percentage points below list if you were just a regular bidder, so if this is the case, maybe you aren’t really getting a 50% discount, maybe it is really 45 or 47%. Buying the right home in the right area is critical as many of the homes listed on this program are extremely cheap homes in places like rural Alabama or inner city Detroit. You can search for all available homes at HUDHomestore.com — make sure you filter on the GNNP program. You want a higher value, satisfactory condition home in an area that is acceptable to you.