Foreclosures vs. Sheriff Sales: Should You Invest?
The Real Estate Learning Curve
Whether you are an experienced real estate investor or are just starting out, the learning curve can be daunting. Within real estate, there are countless rules, laws, and codes — so understanding all the nuances takes years of experience. States, counties, and cities have various, unique regulations that pertain to the purchase and sale of real estate. Needless to say, having an expert on your side will prove to be more than valuable in your real estate purchases.
If you are intrigued by the opportunity to purchase investments far below market value, then I am sure you have stumbled across foreclosures or sheriff sales. Often times, even experienced investors do not truly understand what the real difference is between them. Understanding how they differ and how they can benefit you will give you another tool in your investment real estate belt.
Foreclosures vs. Sheriff Sales
Foreclosed homes
In a foreclosure sale of real property, the mortgage lender has repossessed the property without involvement from the courts. A foreclosure sale can be a public or private sale of real property. Typically the bank will release the property to a local broker for sale on the open market once the repossession of the property has concluded. Foreclosure properties generally allow for access to the property in order to perform due diligence.
The buying experience is relatively similar to a traditional real estate sale. Here is a list of the various methods to buying a foreclosed home:
Real Estate Owned (REO) - This refers to properties that are now owned by a bank or a lender. Banks will buy foreclosed properties at an auction and resell them to recoup what is owed on the property. Once in possession, the bank will typically clear any liens and evict the current occupant.
Short Sale - Also known as a pre-foreclosure, this type of sale happens when the homeowner owes more than the property is worth so they try to sell the property “short” of what is owed on the property. In this type of arrangement, there is an agreement made between the borrower and the bank as to what an acceptable price is. The property is sold on the open market. A short sale is s step or two prior to a foreclosure or sheriff sale. It is a better outcome for a borrower than a deed in lieu of foreclosure. Once a borrower has completed a short sale, it could take up to 3 years to be able to secure another mortgage whereas a foreclosure is up to 10 years. For a buyer, you will need to understand this type of purchase is extremely time consuming. Short sales easily take 6 months to close successfully due to all the paperwork and red tape. It takes a great deal of patience for a buyer and ton of cooperation on the part of the seller to be successful however, many times it is well worth the wait.
Auction - The most common type of foreclosure sale, an auction will use a third-party to run the sale of the home after the bank or lender has taken possession. This can be a great way to score an affordable property. These are cash purchases only and it is very unlikely you can do a property inspection or appraisal prior to purchasing. A foreclosed home’s minimum bid is usually set at the balanced owed on the mortgage and then is sold to the highest bidder. These auctions are usually held as online, sealed bit auctions.
One thing to always take into account with a foreclosed property or a property purchased by way of a sheriff sale is to know what you are buying. You must undertand the type of deed you will be inheriting and what that means for your ability to resell the property. You cannot assume all sales are free of additional liens beyond the purchase price so you will need the help of a title agent or attorney to do a title search prior to purchase.
Sheriff Sales
A sheriff sale is a public auction of property repossessed to satisfy an unpaid obligation, and it's generally done because a mortgage lender repossessed the property and is trying to sell it. However, a sheriff sale also can be held for properties seized to satisfy judgement liens or tax liens. Not all sheriff sales are successful. If a sheriff sale auction does not have a successful bidder because of lack of interest or lack of meeting an acceptable price point, the lender will take the property back into inventory to likely sell on the open market. Sheriff sales are closed property sales meaning no access is available to the property prior to the sale and the purchase is an “as is” purchase.
If you are interested in acquiring this type of sale, there is some important information to consider.
Order the title report for the property you intend to bid on — this will give you a clearer picture of what is owed on the property.
Visit the property beforehand — do not purchase site unseen. Even if you cannot access the building, it’s always good to take a look at the foundation and the exterior of the property.
If you are the second bidder, your offer will be considered as the backup offer. If the first bidder does not pay within the allotted time, you will be next in line for the property.
If the property is still occupied at the time of the sale, you would assume the responsibility of that occupant and this can require court action to evict the occupant.
Where to source these deals
If you think a foreclosure or sheriff sale is right for your next investment property, there are multiple avenues you can take to try to find the right deal for you.
Visit government agency sites — they will sometimes list government foreclosures. Many public facing sites like Zillow will also list foreclosures or pre-foreclosures.
Search county records as there will be public notices filed. You can even reach out to the local courthouse or do an online search through their database.
Mortgage lenders and banks sometimes list the properties they are selling on their own sites.
Attend a sheriff sale — These are listed on county websites and are typically held at the county courthouse.
Search for public online auctions sites. There you can register as a bidder and save searches that meet your investment criteria.
Contact your real estate agent to help you source these deals. Your agent should be able to help you hunt down the best foreclosure/sheriff sale deals!
It’s important to note, foreclosures and sheriff sales can be risky, so proceed with caution. If you are taking the leap into this kind of real estate investing, be sure to have cash on hand while doing as much research on the property as possible. Your attorney or title agent will be extremely helpful in this area to keep you from getting in over your head.
This information may not be used as a substitute for legal and/or financial advice and you should consult your attorney and or financial advisor for professional advice if you have any questions relating to this advisor guide.