PRE-FORECLOSURES, BUYING AT THE SHERIFF SALE, AND BANK OWNED PROPERTIES

There is a lot of interest in buying foreclosures or bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject.   Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”.  The fact is that there are no secrets, and to make money does require effort.

Pre-foreclosures/Foreclosures

A pre-forclosure or foreclosure property is one that is in "default" on the mortgage.  Sometimes these properties are called "pre-foreclosure", as they have not yet ended up at the Sheriff Sale.  The owners have stopped paying the mortgage and the lender has filed an action to have the collateral (the house) sold in order to repay the debt.  In Pennsylvania, which is a "judicial" state, there is a requirement for a legal action to take place before a home can be taken back by the lender or foreclosed upon.  Not all states require judicial action--some lenders can initialte the foreclosure after only a few months in default.  In Georgia, for example, the process from start to finish can be as little as 3 weeks.  In PA, that same process can take anywhere from 4 months to years if the owner files bankruptcy.  Once a property falls into foreclosure, it can be saved from the Sheriff Sale up to 1 hour before the sale if the debt is paid.

Many investors try to assist homeowners by buying their homes at below market prices, in order to save the home from foreclosure.  By doing this the homeowner gets to avoid foreclosure, save or repair their credit, and may in some instances get some money to be able to move and find rental housing to get back on their feet.  Often these houses have fallen into a state of disrepair, so the investor gets a good, below market deal, improves the neighborhood by rehabbing the house, and makes a profit when re-selling the house.  It can be a win-win for all.

Buying Houses at the Sheriff Sale or Foreclosure Auction

In Pennsylvania, the foreclosure aution is known as the Sheriff Sale.  If you have ever gone to a Sheriff Sale, you'll feel the room a buzz with anticipation, and may often witness a bidding frenzy on certain properties.  There is a BIG CAUTION HERE!  Anyone going to the Sheriff Sale thinking that this is a great way to buy a property at a great price needs to think again.  The truth is, there are very few bidders at Sheriff Sales, and the ones who do are expereinced, armed with cash, and know the properties they are bidding on very well.

When buying a property during a foreclosure sale, you must pay at least the loan balance or "upset price" (the amount the attorneys for the lender have set to begin bidding) plus any interest and other fees accumulated during the foreclosure process.  You must also be prepared to pay with cash in hand.  And on top of all that, you’ll receive the property 100% “as is”.  That could include existing liens and even current occupants that need to be evicted. 

So, be very careful.  The Sheriff Sales are open to the public.  If you have any interest in this kind of investing, be sure to go to the sale often and understand the process.  The big secret is that there are really no deals here, except occasionally.  Most of the best deals are going to be at the pre-foreclosure stage if an agreement can be made between the seller and the investor.  Otherwise, a bidding frenzy could leave you with big buyers remorse.  

Buying an REO?
REO stands for “Real Estate Owned”.  These are properties that have gone through the foreclosure process and are now owned by the bank or mortgage company.  They are properties that were not saved from foreclosure, and were not sold at the foreclosure auction.  An REO, by contrast, is a much “cleaner” and attractive transaction.  The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing.  Do be aware that REO’s may be exempt from normal disclosure requirements.  In many states, including Pennsylvania banks are exempt from giving a Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of.

Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money.  This simply isn’t true.  You have to be very careful about buying a REO if your intent is to make money off of it.  While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it.  When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale.  The bargains with money making potential exist, and many people do very well buying foreclosures/REO's.  But there are also many REO’s that are not good buys and not likely to turn a profit. 

Ready to make an offer?
Most banks have a REO department that you’ll work with in buying a REO property from them.  Typically the REO department will use a listing agent to get their REO properties listed on the local MLS.  Before making your offer, you’ll want to contact either the listing agent or REO department at the bank and find out as much as you can about what they know about the condition of the property and what their process is for receiving offers.  Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it.  As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender.  After you’ve made your offer, you can expect the bank to make a counter offer.  Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer.  Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends.  It’s not unusual for the process of offers and counter offers to take days or even weeks.

If you are interested in finding out more about local Sheriff Sales and how they work, log on to the Bucks County website and learn more about Sheriff Sales