Buying foreclosures at the Sheriff's
Sale (or Auction as it's commonly known) is one of the best ways to make big
profits in the distressed property business. It is also the easiest way to
lose your shirt.
The sale of the property comes at the end of
the foreclosure process when the defaulting homeowner can't repair his
financial problems with the lender.
About half one half of our states uses the
"judicial" process when foreclosing mortgages. This process starts with the
mortgage document, a security device used to pledge the property as security
against the loan.
When a default occurs, the lender will attempt
to end the homeowner's rights of possession to the property. The lender must
file suit and prove in court that it has the right to sell the property to
recover its loss by virtue of the default and as stipulated in the signed
mortgage agreement. If awarded a final judgment from the court, the lender
will proceed with the foreclosure and the property will be scheduled for
sale.
Properties are sold at public auction under
the direction of the court in the county where the property is located. The
successful bidder becomes the new owner of the property. About 80% of the
time the successful bidder is the lender, the original mortgage holder.
Attorneys will be there to bid on the property
for the lender. There will also be investors, onlookers and curiosity
seekers observing the proceedings. Occasionally, a lien holder will appear
trying to salvage what he can from his claim. Rare but certainly possible,
the homeowner may show up to bid on his own property.
Advantages
The biggest advantage to buying properties at the Sheriff's sale is the high
profit potential. If there is a large difference between the market value of
a property and its final judgment amount at auction, you can really win big.
Typically, the largest cash rewards come from the proper application of this
investing method.
Sales are usually advertised 4 - 6 weeks in advance. In some states, this
information may be available 6 - 8 months or more before the sale. This
gives you ample time to research the property, the condition of the loan and
the condition of the home owner. Why the home owner? If you can work out a
satisfactory arrangement with him, you can save yourself the trouble at the
auction. If you meet with the owner and can't work out a deal, you should at
least take careful note of the property's condition. This gives you a
competitive advantage over other auction bidders.
You can go to the courthouse and observe the process as often as you like
before going to bid on your property. It's certainly a good idea to
familiarize yourself with the auction process.
There usually isn't much competition for properties sold at auction.
Sometimes no one shows up to bid on a property, perhaps due to
transportation problems or inclement weather. This creates fantastic
opportunities for the diligent investor.
Disadvantages
Buying at the courthouse can be very dangerous for those who do not do their
research properly. Horror stories abound.
The large cash outlay required to buy the property is the biggest deterrent
for most buyers. Certified checks and sometimes cash will be required to bid
on properties.
You may have to pay off the sale amount within 30 - 90 days. In some states
it's a matter of days. Here in Palm Beach County, Florida, the successful
bidder must pay for the property in full by 3:00 PM on the day of the
purchase. That's just 6 hours from the time the bidding starts to the time
you must pay for the property in full or risk losing your cash deposit.
You may not be able to inspect a property before bidding on it. In that
case, there is little chance you will be able to assess the property damage
and replacement costs. This hinders your ability to determine the true
market value, your maximum bid amount and your profit.
If you are the successful bidder, you may have to evict tenants currently
residing in your new property. This could take several months. This also
interferes with your plans to repair and quickly sell the property for a
profit. This delay increases your carrying costs and erodes your profits.
There may be land use problems with a property such as zoning or
environmental issues like petroleum contamination or toxic waste. A clue to
avoiding a problem property is when the lender's representative fails to
appear or bid on the property. If the lender doesn't want it, you don't want
it either.
Failure to research a property correctly leads many to over-bid. Too often
properties are purchased for much more than their value. This accompanied by
"auction fever," the tendency to get caught up in the heat of the moment and
over-bid, results in large over-payments and even larger losses.
The most important concern perhaps is the possibility of other liens or
judgments. As the successful bidder, you replace the homeowner's position in
the property. Any problems clouding the title are your problems now. This
includes other mortgages, mechanics liens and taxes.
At the sale, the first lien holder can nullify all other liens if he's the
successful bidder. Junior lien holders must buy out senior lien positions
and be high bidder to gain possession of the property with clear title.
The first mortgage holder is not the only one foreclosing properties. If a
third lien holder forecloses, the process will not wipe out the first and
second lien holders. Buying this property means you buy these liens as well.
Typically, first mortgages are the largest liens on the property.
Researching Properties
The only way to be sure that this is a first mortgage holder foreclosing is
through a full title search. The cost of the search is nothing compared to
the potential loss from not investigating the condition of the title.
Locate properties going to sales or auctions by looking for "Foreclosure
Sales" or "Sheriff's Sales" or "Auctions" in your newspaper, real estate
magazine or by contacting the county clerk's office.
Evaluate the properties and determine their profit potentials. Do this by
determining the market value using comps, appraisals and brokers' opinion of
price. Subtract the default amount from the market value. If there is a
significant difference, you may have a winner.
Inspect the property if you can and assess any damages or repairs you must
make before re-selling the property. Deduct those expenses from the profit
you calculated earlier.
Calculate your profit potential. Start with the price you can sell the
property for in good condition. Subtract any repair expenses. From this
number, subtract the costs you will incur while holding the property (loan
payments, taxes, insurance). Subtract from this the closing costs you will
incur when you sell the property, including a broker's commission if you
intend to sell your property through a broker.
Locate any other liens or judgments, and subtract those amounts from your
previous figure. Paying off the liens at a discount is one way to increase
your profits, assuming you are the successful bidder.
Your sub-total so far, is your expected sale price of the property, less
repair expenses, holding costs, liens and closing costs. This is the "net to
you" after you sell.
Deduct the default or final judgment amount from your last sub-total. This
is your gross profit potential, hypothetically the most you can make
assuming all goes well.
Determine your maximum bid amount. The lowest you can bid is the final
judgment amount. The highest you bid is the "net to you" amount. Any amount
over that break-even point results in a loss. Determine the minimum profit
you want to make. Subtract your desired profit amount from the "net to you"
figure. That's your maximum bid amount.
Going to Auction
Prepare for the auction by phoning ahead. Make
certain that the sale hasn't been postponed. Determine the requirements for
purchasing properties. How much deposit is needed? When is the balance due?
What type of payment is required?
Attend the auction. Arrive early. Properties
are sold very quickly, sometimes within minutes. Pay attention. Register
yourself as a bidder if necessary.
Listen carefully for your target property to
be announced. Observe the bidders. Know your competition. Do not announce
your intentions to anyone there. Never bid more than your pre-determined
amount.
The successful bidder will receive a deed, the
type of which depends on who is conducting the sale and state law. Record
your new deed and obtain title insurance as soon as possible.
Remember to research properties and their
liens thoroughly. Calculate your expenses and profit margins. If you can not
inspect a property, leave your self a little extra room and some extra cash.
Experts agree: if you are unsure about
the property, don't do the deal!
Investing in foreclosures can provide
excellent profits. Each of the three foreclosure opportunities presents
both rewards and certain risks. Be sure to do your homework before you
buy.
Distress Sales resulting from bank
foreclosures often represent a great way to get a fantastic deal on a
home. It's not easy for the average homeowner to find these deals,
because you have to keep scouring the paper to see when one comes up.
If you're the type of person who
recognizes what a great deal some of these properties could represent,
you will be interested to know about a new free computerized service
which automatically searches out and downloads a current list of all
such properties day in and day out. When you receive this free, no
obligation service, you're automatically plugged in to the most current
list of Foreclosure Properties on the market, in the price range and
area that interests you. This FREE service every week will save
you a lot of research and running around.
Here's how it works. Every week, you will
receive a FREE computerized report listing the current
Foreclosure properties in your desired price range and location. There
is no cost for this information, and absolutely no obligation. This
insider information, sent to you in an incredibly simple and efficient
format, will give you a huge advantage over other buyers in the
marketplace.
You can request this free service by
simply filling out the information on the Palm Beach County Foreclosure
Weekly form available
by clicking here and including the specific price range and area you
would like the "Foreclosure Weekly Report" on. When you have
completed the form
just click the "Submit" button at the bottom of the page.
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