HUD foreclosures are homes that had loans on them guaranteed by the Department of Housing and Urban Development. When owners default, they lose the house. HUD pays off the bank and takes possession of the home, which they try to sell for market value.

In most markets today, they probably do sell close to market value. Government bureaucracies may be inefficient and they certainly make mistakes at times, but then it isn't some bureaucrat putting the price on the houses. Normally HUD's foreclosure houses are sold by real estate agents, and they should have some idea of what a property is worth when they recommend a listing price.

Also, HUD takes bids first from owner-occupant purchasers first. Only after this initial offering period are investors allowed to buy the home. In other words, if there is a truly underpriced home, an investor may never have a chance to buy it anyhow. But there is some good news.

Fortunately, there are some opportunities here for the real estate investors who want to do some work. You can sometimes flip a HUD house for a good profit if you're willing to run the numbers and do a little work. Why? Because HUD foreclosures are sold "as is," and often have enough problems to scare away most home buyers.

They may sell near "market value," but a beat-up house will often have a market value that leaves room for a good profit after fixing it up. The market for such a house is mostly investors, after all, not owner occupants. Real estate investors will pay only what works for making a decent profit.

In other words, the initial offering period that is open only to owner-occupants is not a problem. Think of it as a free service to you. The buyers are screening out the homes that wouldn't sell cheap enough to fix and flip for a profit anyhow. Anything that doesn't scare them away doesn't have much potential, so you are left with the ones that CAN be profitable.

To invest in HUD foreclosures, find a real estate agent that handles them in your area. Look for properties that have problems, but problems for which you can estimate the cost of correction. Get advice from an agent on what the finished home will sell for, subtract from that every last possible cost to fix it up, and subtract your profit. Now you have the highest price you can offer.