Buying distressed properties at Sheriff’s Sales
Although the mortgage foreclosure crisis is winding down, there are still many distressed and bank-owned properties available. In fact, according to RealtyTrac, there were “613,874 U.S. properties with foreclosure filings — default notices, scheduled auctions and bank repossessions — in the first half of 2014”.
I don’t have to tell you that buying distressed properties is a lucrative way to invest in real estate. However, if you have always made these types of investments after the foreclosure proceedings were completed, you may be leaving money on the table.
In a typical foreclosure, the bank receives a judgment against the property owner. To pay back a portion of all of that judgment, the home is foreclosed and is auctioned off at a Sheriff’s sale. At the sale, the lender will typically place a credit bid for the property. Investors can bid against the foreclosing lender; however, at many of the auctions that I attend, the bank is the only bidder and gets title to the property. The bank then lists the home with a realtor.
In many cases, when the bank places their bid, they know there are going to incur post-sale expenses, including carrying costs and realtor fees. In many states, the bank can also go after the defendant for any deficiency balance. For these reasons, the bank will bid the minimum amount that it wants for the property. Although there are risks and expenses involved, you can save thousands of dollars by bidding against the lender at the Sheriff’s sale, instead of waiting until the bank lists it for sale after the auction.
There is risk involved:
1. You are buying the property “as is”, and although you may be able to get an idea of the property’s condition from its exterior, in most cases, you are buying the property without the ability to see its interior condition.
2. There could be title problems which prevent you from obtaining clean title to the property.
3. The property may be occupied by the defendant or other tenants, and you will need to initiate eviction proceedings to force them to move.
4. At most Sheriff’s sales, you must have cash available to immediately pay the bid amount.
Despite these risks, buying distressed properties at Sheriff’s sales can be very lucrative. Below is an overview of the process. Because laws are different from jurisdiction to jurisdiction, retain a local real estate attorney to advise you and to help you with the steps outlined below.
Step One: Find Out What Houses Are Being Foreclosed
Most states have publication requirements for any houses that hit the foreclosure block. For that reason, if you want to learn what properties are available, simply thumb through your local papers. In addition to listing properties in the newspaper, many counties have online listings. Check for foreclosed property listings on your local Sheriff’s department and County Clerk websites.
Step Two: Call the Lender or Its Attorney
If you are interested in a property, call the creditor or the attorney representing the lender in the foreclosure action. Ask what the creditor plans to bid. Sometimes, the bid will be too high, and in that case, look for another deal. However, if you think the starting bid is low, ask if the lender has a broker’s price opinion or appraisal that it would be willing to share with you. Also, ask if they have performed a title search, and if so, if there any other liens or problems with title to the property.
Step Three: Check Out the Physical Condition of Property
In most cases, you will not be able to view the inside of the property before the sale, but you can get some idea of its condition by viewing the outside of the property. Look for any structural damage that could be potentially expensive to repair.
Step Four: Order a Title Search
At this point, if you are still interested in the property and believe it will be a profitable investment, you should get your own broker’s price opinion or pay for an appraisal. Even more importantly, order a title search to ensure that you will be able to get clean title to the property.
Step Five: Learn the Bidding Requirements
Many counties have specific bidding requirements. For example, the Sheriff may only accept certain types of payment and may have strict deadlines for submitting written bids and any post-sale documents, such as Sheriff’s deeds. Call the Sheriff’s office to learn their requirements.
Step Six: Close the Deal
Show up early and be ready to bid. Most Sheriff’s sales move quickly, and if you are not there on time, you will lose your opportunity to acquire the property. If you win the sale, make sure you follow your jurisdiction’s steps to close the deal. You will probably be required to submit a Sheriff’s deed for recording with your county recorder’s office. You should also obtain title insurance as soon as possible. If the property is still occupied, you may also need to initiate eviction proceedings.