No Bids at the Sheriff's Sale....How Do I Buy An REO?

Question

Hello BP,

I have been attending the weekly sheriff's sale in Detroit (Wayne County, MI) to learn the ropes and recently saw two properties I was interested in have their deeds called, but there were no investors who wanted the properties. (An aside, only a few people attending these auctions actually buy in the city of Detroit....most go after the suburban properties...I'm sure @Joshua Dorkin would find this amusing!). If my title search for these two particular properties comes back clean, what is the best way to approach the bank to buy them?....and is it likely the bank would sell them to me for less than the sheriff's sale price?

Some background...one SFH house had $112K debt and was offered for $38K (no takers) and the other had a debt of $65K and was offered for $65K (fair price, but no takers).

Going forward, I will have my title searches done prior to the auction and will gladly bid $1 over the price, but like I said I've been a spectator for the past few months. I'm just curious what will happen next to these two houses I like...and is there still an opportunity to buy one of them?

Best,Marc

Account Closed · Answer

Marc M. If you need any assistance with on-off market deals and auction advice, I can assist. Thanks

Tom A. · Answer

Marc M., In Michigan the homeowner generally has a six-month right of redemption after the sheriff's sale. The foreclosing bank is not able to sell the property to anyone while the homeowner still has their redemption rights. After the redemption rights expire the bank takes the property back and it will be listed for sale, usually pretty quickly but sometimes with long delays. There's no way to know for sure when it will be listed or which REO agent will receive the listing.

You might have luck with a small bank or local credit union in approaching them directly but if it's a big national Bank, forget about it.

You can approach the homeowner and attempt to buy the home from them. They would have to redeem the home, in this case for $38,000 plus fees but they would then be able to sell it to you at a price that negotiated with you. Most likely the homeowner doesn't have $38,000 nor would they have access to it from some other source, but you may be able to structure the deal in a way that makes it possible for the deal to happen. I would talk to an experienced real estate attorney.

Wayne Brooks · Answer

We don't have redemptions here, so I don't know the procedures/laws.  But, as far as I know, redemption is for the full amount owed.  No, a mortgagor couldn't buy the house back for $38k, the debt is $112k.  The bank being made whole by PMI is also a misconception.  PMI generally only covers the difference between the borrowers down payment, and what would have been a 20% down payment.  Ie., with 10% down, PMI covers the next 10% only, Not the entire loss.  Someone is losing Real money, whether it be FHA, Fannie/Freddie, private investors (pension funds, etc.).  An owner is only entitled to a surplus above the total debt, not some arbitrary "starting bid", and assuming there are no junior lien holders.

Jon W. · Answer

Marc M. I have seen a realtor approach a foreclosed homeowner during the redemption period and list it for sale on the MLS as a cash sale with 10 day close.  It happened to be 10 days until the exemption expired so the only person who could buy it would need cash.  It was screwy but I ended up buying the house. I think the homeowner walked away with just a few hundred dollars.

Marc M. · Answer

Thanks for all the replies! @Tom A., this is exactly the kind of deal I am interested in figuring out:

You can approach the homeowner and attempt to buy the home from them. They would have to redeem the home, in this case for $38,000 plus fees but they would then be able to sell it to you at a price that negotiated with you. Most likely the homeowner doesn't have $38,000 nor would they have access to it from some other source, but you may be able to structure the deal in a way that makes it possible for the deal to happen. I would talk to an experienced real estate attorney.

I've spoken with other investors at these auctions, and they warn of this exact situation happening to the purchaser of the sheriff's deed....that is, a shark-investor undermining an another investor's deal by using the homeowner to redeem the property, and walking away with the quitclaim deed in hand after paying off sale amount + interest to the first investor during the 6-month redemption period. Or alternatively, a realtor approaches the homeowner and lists the house for sale above the auction sale price but still well below market value....Is anyone else familiar with these strategies?

Marc M. · Answer

@Wayne Brooks, I think we've been over this before, and forgive me for asking again....but what purchasing rights do the previous owner's have during their 6-month redemption period? In the case of the house that had $112K of debt and did not sell at auction for $38K....(so now the bank has an asset on their balance sheet for $38K assuming they recaptured their $74K loss through federally backed loan guarantees or PMI)....can the foreclosee buy their home back from the bank for $38K? Or can they only redeem the property for $112K?

And hypothetically, if the house was competitively bid on above and beyond the $38K....let's say it went for $48K at the auction, is not true that the forclosee would be entitled to the $10K above asking price?

Wayne Brooks · Answer

The bank already has their own REO agents.  Unless it is a Small local bank, no chance.

Marc M. · Answer

@Wayne Brooks, so you don't think I could approach the bank with an REO Agent or Tax Sale Attorney before the house hit the market?

Wayne Brooks · Answer

These two houses will get listed with an agent at some point.  You won't be able to buy them before that.  You could have an agent set up a search for those two addresses and they'll pop up when listed.

Emmett R. McCarthy · Answer

Make sure your title searches also include a search for delinquent taxes and tax sales. It may be cheaper to acquire them via tax deed than a deed from the lender and convey clear title (you should check with a tax sale attorney in MI).  You should also contact the lender directly, they are notorious for basically giving away non-desirable REO properties. Good luck!

No Bids at the Sheriff's Sale....How Do I Buy An REO?

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