Sheriff's sale: why would anyone default if they can sell on MLS?

Question

I hear stories that people have bought houses for 10 cents on the dollar at sheriff's sale/auction.  How is that possible?

Why would a 50% equity homeowner default when he/she could put their property on the MLS at 75% market value and sell it in a week?  That owner would still make out with 25% of the value and save his/her credit.

And if this were somehow possible, wouldn't the bank just bid up on this property until (say 75% of market value) and then let investors take if they still want to outbid at that point?  Why would a bank let someone outbid them at 10% market price?  or even 50% market price for that matter.  I've had banks turn down my offer of $55k on a $61k foreclosed property (and distressed!).  I can't imagine that same bank letting an investor pick up that same property at sheriff's sale for $15k or even $25k.

Let's assume we're talking about sheriff's sales for 1st liens, and not the unwanted scenarios where the sale is for the 2nd or even HOA fees.

Todd Neu · Answer

I attended my first sheriffs' sale 3 months ago and just sat back, watched the process, took notes, and afterwards, asked a lot of questions to the 2 deputies who put on the sale. There are a few departments you will want to make your face known in: Recorders office - helps you do a title check to see what liens/mortgages are tied to the property, Clerk of Courts - Check to see judgments against the property owner, Treasurer - Check history of properties with county tax/sewer/water liens.  Sewer and water remain on the properties (run with the land) after a sheriff sale.

Bank owned properties will sell by 2 sales dates.  In fact, I have not seen one go to a second sale. The banks want their PMI (Private Mortgage Insurance) money, which can take 2 - 6 months after a sheriffs' sale. So they will "buy" back the property, sit on it until the PMI pays out, then hire a Broker to sell the property.  Sometimes, this is a better deal for you to wait until the property goes into the Real Estate Owned (REO) status, or repossession state.  For example, if a property has a judgement of $100,000, and it is only worth $60,000, the bank will buy it back; get paid possibly $60,000 in PMI, then list it as a REO for $60,000.  A buyer may offer $40,000 and the bank may accepts it since $60,000 + $40,000= the $100,000.  The purchaser could then invest $10,000/$20,000 into the property and hopefully flip the property for $80,000, returning a $20,000 profit (minus taxes and real estate commissions).  This is a very basic example, but is generally what happens here. To make money flipping, my rule of thumb is never have over 70% invested of the total "comparable" price of the home.  Comparable is what "like-type" homes sell for in the area of the home.  REO properties in the local area are usually listed with REO brokerages. The nice option about REO properties is that you can go through them and look at their condition.  Also, any back taxes have been paid by the bank, so that is one less item to consider.  I would still pay for a title search. The bank also pays all realtor commissions, which around here are usually 6% of the net sale.

Robert Leonard · Answer

@Bao Nguyen You didn't say who you are "hearing these stories" from, but it's probably an exaggeration if not totally made up. Properties that sell at the sheriffs sale usually have significant legal fees added to what's owed. The idea of a 100k property selling for 10k is extremely unlikely to ever happen. There are a lot of factors in what banks do at foreclosure sales that involve the process of collecting on mortgage insurance. It's not all logical or easy to understand. A small percentage of the sales are opportunities to get a good deal, but it's not a place to buy if you don't know the risks involved. The investors there are in the shark category - they know their stuff.

What are the details of your 55k offer on a 61k property? Is 61k the asking price or your estimate of value? How long has the property been on the market? Did you make your offer through an agent? Is the seller HUD, Fannie Mae or a bank? There are a lot of different banks and government agencies that sell REOs and no two of them are identical for their processes or what you can expect from them.

What are the details of your 55k offer on a 61k property?  Is 61k the asking price or your estimate of value?  How long has the property been on the market?  Did you make your offer through an agent?  Is the seller HUD, Fannie Mae or a bank?  There are a lot of different banks and government agencies that sell REOs and no two of them are identical for their processes or what you can expect from them.

Jay Hinrichs · Answer

@James Wise  in our area the bank can simply instruct the crier to bid for the bank..  you Rarely ever see a banker at one of our sales. just a bunch of scuffy dudes with millions of dollars of cashiers checks chasing one deal that might make them 10 t0 20k per 200k invested in cash..

far too much money out here chasing these things  :)  you folks are spoiled out there in surplus real estate land.

Jesse T. · Answer

If there are examples of 50K purchase of properties that ultimately sell for 100K that likely isn't the whole story.

Hypothetical situation:

Let's say the buyer does buy the house for 50K.  A lot of times there are back taxes and other liens that may not have been wiped out in foreclosure.  Let's assume 5K.  So now the buyer is in for 55K.  This house isn't in saleable condition - 20K for repairs.  we are up to 75K now.  Let's say money is cheap and carrying costs are only 2K.  Ok the buyer is in for 77K and can now put it on the market.  They get an offer for 100K - great!  Oh but it takes 5K in seller assistance.  6K to pay the agents.  That brings the total to 88K.

12K in profit on a 50K house selling for 100K.  Not bad, but not 100% profit either.

Wayne Brooks · Answer

@Bao Nguyen You're likely not aware of the true picture.  If a bank is owed $10,000, that's all they're allowed to bid as the creditor.  They wouldn't get any of the money over $10k any way because that is all they are owed. You mentioned you could buy a 2nd mortgage foreclosure at .10 on the dollar. Not correct.  If you bid on a 2nd mtg foreclosure, you also inherit the first mortgage, which may be more than the property is worth.   Trust me, bidders at the auction aren't stopping at 10 or 50% of value, just not happening.

David Mitchell · Answer

A property may also go for cheap because there are other liens, judgments or taxes to consider.  Could be the foreclosing entity was the HOA/COA.  Many scenarios where people have come to us to run a search after winning a property at auction, only to find out it wasn't the 1st lien that foreclosed and the "great deal" wasn't a great deal.

Bao Nguyen · Answer

It makes sense that the banks are in the business of lending and not real estate.  However, ever since 2008, I have begun to believe otherwise.  Case in point: I made an offer of $55k on a $61k foreclosed property - only to have it turned down.  The property has been vacant for 7 years - ever since the crash, and the property is only getting more damaged by the day (roof is caving in).  The offer was made in the middle of December.  The bank won't be able to sell this property until spring or summer, or if at all.

Bottom line is, banks are holding onto properties even more tightly the shrewdest investors who are trying to sell their properties.  They are landlords, without tenants.

I believe most realtors would agree with me: banks are pricing their foreclosed properties quite high in many, if not most, scenarios, and they are refusing to negotiate much, if at all on prices.  Banks are not in the business to sell quick; they are in the business to hold on to properties indefinitely if there's any chance of a higher selling price.

It still makes no sense to my why a bank would let a $100k property go for $10k at auction when they don't even accept $55k offers on a $61k property.

Anyone working closely with banks (HUD/Homestead/Foreclosure Realtors?) care to give any insights on this conundrum?

Account Closed · Answer

The bank isn't in the business of real estate. They are in the business of lending. They don't want bad debt sitting on their books. Presumably, they have made some money off the interest charged and just want the remaining balance due which is mostly principle at this point.

Mike Cumbie · Answer

Hi @Bao Nguyen,

To get to where I think your original question is "Why would an owner default when they only owe 50K on a 100K property"

Sometimes there is a death in the family or a job loss etc and the owner can't make their $820.00 a month house note. Either they think they can catch up later or they just throw their hands up then. They end up getting 3-4K behind and then electric is off and water is threatening. There was a time where you could reach out to them and "refinance" them and make a set of closing costs for yourself. But shady dealers and government regulators made it illegal to even call them at that stage of the game in some areas.

Another reason is that with how long it takes to get the homeowner out it could easily be 1-2 years. so 8-18K worth of payments saved they see. so they are going to hang on. Also for the bank, the longer it takes the more they build up in late fees and admin costs (Which they get to pin on the government on a federal backed loan after it satisfies). Because they were guaranteed they would lose no money if they gave a loan to John and Sue Smith.

Just my 2 cents.

Steve M. · Answer

I purchased a property at sheriff foreclosure by HOA and in the redemption period. The redemption period is up Aug 12, there are several liens on property but I've met with two attorneys and the said the sale will be final and worst case scenario is ill have a cloudy deed but a quiet title action will allow me to sale property at later date. Since the lien holder were served with paper regarding sale by firm representing the association I will be not held responsible for those liens. Feedback is greatly appreciated and valued. Thank you!

Sheriff's sale: why would anyone default if they can sell on MLS?

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