Investing in a foreclosed property is one way of getting a great deal. After all, people are still struggling to get out of the housing bubble that burst some years back, adjustable-rate loans continue to reset and bump up mortgage prices, and truthfully, there will always be people that fail to pay for their properties regardless of how well the market is doing.
This inevitable crisis provides investors many opportunities to purchase homes that were once too expensive to buy.
It also gives investors the chance to build a solid portfolio in a short amount of time, and with limited cash on hand, because foreclosures are cheaper than going rate properties, sellers are motivated to sell quickly, and the lenders are often willing to make a deal so they stop losing money on a property that isn’t being paid for.
However, there is another way you might be able to cash in on foreclosed properties. And, while this method is thought to be very complex, and the chances you need a professional to help you along the way are high, you can still rake in a steal of a deal by getting involved in what is called a Sheriff’s sale.
Today we are going to look at what Sheriff Sales are and how they can be used to invest in property that you might otherwise never be able to afford.
How Does a House Go to a Sheriff Sale?
When a homeowner defaults on their mortgage, the mortgage lender will immediately halt the homeowner’s rights to the property and take control of it. The lender then files a lawsuit stating that the mortgage obligations have not been fulfilled, that they have the right to take the property back, and that they plan to ultimately sell the property to recover any losses incurred on the initial loan.
Mortgage lenders sell properties that have been foreclosed on via auction. However, the type of auction the property is sold at largely depends on the state’s rules and regulations regarding foreclosed homes.
Let’s take a brief look at the difference between a foreclosure sale and a Sheriff Sale.
What Are Foreclosure Sales?
If the mortgage lender repossessed the property that was defaulted on without any involvement from the courts, they will typically sell the property to recover their financial losses via a public or private auction, otherwise known as a foreclosure sale.
Foreclosure sales often garner higher sales prices than its alternative – the Sheriff Sale. This is because foreclosure sales tend to allow inspections of the property so those interested in investing in them have a better understanding of the condition of the property they are bidding on.
What Are Sheriff Sales?
If the mortgage lender repossessed a property with the help of the courts in response to an unpaid loan obligation, and the state requires that the sheriff of that county oversee foreclosure sales, a public auction will ensue.
Keep in mind that all properties sold at Sheriff Sales are still considered foreclosed properties. They are just being sold in a different way than a traditional foreclosed property.
In addition, Sheriff Sales do not discriminate when it comes to property type. Any property that has been defaulted on – single family and multifamily homes, mixed use properties, and even commercial buildings – can be foreclosed upon and sold at a Sheriff Sale.
Sheriff Sales can also occur to satisfy judgment or tax liens on a property that has been repossessed by the Sheriff. In fact, in some states, the only way to sell a repossessed property is via a Sheriff Sale.
Lastly, it is important to note that Sheriff Sales are conducted locally within the individual county that a repossessed property is located.
How to Make Money on Sheriff Sales
Any type of foreclosure is going to lend the possibility for you, the investor, to make a profit.
This is because the bank lender is desperate to recoup any money they can on the defaulted loan, and the homeowner that defaulted is desperate to move on without the foreclosed property hanging over their head (although, keep in mind that foreclosures stay on your public record for a number of years).
However, as mentioned earlier, traditional foreclosed properties are going to be more expensive to invest in because interested buyers can inspect properties beforehand, thus making quality properties more appealing.
That’s not to say you cannot benefit from investing in a Sheriff Sale however.
In fact, if you know what you are doing, or have enlisted the help of a real estate attorney or real estate broker that is experienced in the complex nature of Sheriff Sales, you have room to profit significantly from even one property purchase.
The Profit Margin
The way Sheriff Sales typically work is as follows:
- A mortgage document is prepared and approved, loaning a property owner a specified amount of money, to be paid back to the lender over a specified amount of time, in order to own said property.
- The property owner stops making the agreed upon mortgage payments for said property and defaults on the original loan.
- The lender that approved the mortgage loan then sues the property owner for rights to the property and the right to sell it in order to recoup the money loaned out.
- Once the court approves the lawsuit initiated by the lender, the property goes into foreclosure
- The state may then require the property to be sold at a public auction, under the supervision of the Sheriff of the county – AKA a Sheriff Sale.
This is where your potential to benefit monetarily comes into play. The difference between the value of the property at the time of sale, and the actual sale price may leave room for a huge profit.
This because the lender is looking to recoup their loss on the original loan, not make a profit. Any money that was paid into the loan before the property owner defaulted will not count towards the Sheriff Sale purchase price.
For instance, a property that is valued at $100,000 may only sell at a Sheriff Sale for $50,000 (because $50,000 was all the property owner owed to the lender).
If you are the lucky investor that purchases this property, you now have your hands on a piece of real estate that is worth double what you paid for.
Very Little Competition
According to seasoned real estate attorney and real estate broker, Patrick Smith, very few people attend Sheriff Sales these days. This makes bidding on a Sheriff Sale easy.
Sheriff Sales are usually advertised 4-6 weeks before they actually go up for auction to the public. This makes researching the property, the condition of the defaulted loan, and the starting bid that the lender has placed with the sheriff of the county very easy to find, if you know where to look.
As Smith will tell you, you can benefit most from getting your hands on the actual mortgage document and Notice of Foreclosure when it comes to investing in Sheriff Sales.
This, paired with a little investigation (e.g. calling the attorney’s office that is working with the lender to start the initial Sheriff Sale bid), can garner you enough information to decide whether this is a property you are genuinely interested in investing in.
That’s because the attorney working with the lender will know what the lender’s starting bid will be.
And, if the attorney doesn’t give the starting bid up to you in advance, this information will be posted 24 hours before the property goes up for auction. So in the end, you will know what you are up against either way.
Once you make the decision that you want to invest in a property for auction at a Sheriff Sale, all you have to do is show up and bid one dollar higher than the lender and the property is yours. That is, if no one else shows up and bids against you, of course.
However, the chances of this happening are very slim, as mentioned earlier, making Sheriff Sales that much more appealing to investors.
In the end, investing in foreclosed properties is a great way to get a good deal on a property that is worth much more than the starting auction price.
Better yet, investing in property that is for sale by the Sheriff of the county is an even smarter option because the potential to profit off a good piece of real estate that simply wasn’t being paid for by the homeowners is even higher.
If you are looking to get in on this unique way of building your portfolio, make sure you know exactly what you are doing. Do your research, employ the help of professionals if need be to avoid legal trouble, and don’t overpay for a property that is likely to have no competition.
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