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

20 Replies

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.

@Bao Nguyen  I have learned to not ask that why, but how, HOW can I react to this situation that is profitable. Just my .02 cents. I dont do sheriff sales to competitive here.

Out here more often then not the banks buy back most of the properties at the sheriffs sale.

They just bid whatever the amount owed was. So if there is a house that had a mortgage of $45,189 the bank will immediately bid $45,189.

Originally posted by @James Wise :

Out here more often then not the banks buy back most of the properties at the sheriffs sale.

They just bid whatever the amount owed was. So if there is a house that had a mortgage of $45,189 the bank will immediately bid $45,189.

 Let's say the house is worth $100k, and $10k is owed.  Why would the bank bid the minimum of $10k and let me walk out a happy guy with the property at $11k?

Originally posted by @Jeremy Tillotson :

@Bao Nguyen I have learned to not ask that why, but how, HOW can I react to this situation that is profitable. Just my .02 cents. I dont do sheriff sales to competitive her

I agree to some point.  I have a very curious mind, however.  And if it weren't for me wondering "why" and just happily bid, I'd be the proud auction winner of a couple of 10 cent on the dollar auctions for 2nd liens.  :-)

Originally posted by @Bao Nguyen :
Originally posted by @James Wise:

Out here more often then not the banks buy back most of the properties at the sheriffs sale.

They just bid whatever the amount owed was. So if there is a house that had a mortgage of $45,189 the bank will immediately bid $45,189.

 Let's say the house is worth $100k, and $10k is owed.  Why would the bank bid the minimum of $10k and let me walk out a happy guy with the property at $11k?

 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.

Originally posted by @Cory Browning :
Originally posted by @Bao Nguyen:
Originally posted by @James Wise:

Out here more often then not the banks buy back most of the properties at the sheriffs sale.

They just bid whatever the amount owed was. So if there is a house that had a mortgage of $45,189 the bank will immediately bid $45,189.

 Let's say the house is worth $100k, and $10k is owed.  Why would the bank bid the minimum of $10k and let me walk out a happy guy with the property at $11k?

 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.

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?

Originally posted by @Bao Nguyen :
Originally posted by @James Wise:

Out here more often then not the banks buy back most of the properties at the sheriffs sale.

They just bid whatever the amount owed was. So if there is a house that had a mortgage of $45,189 the bank will immediately bid $45,189.

 Let's say the house is worth $100k, and $10k is owed.  Why would the bank bid the minimum of $10k and let me walk out a happy guy with the property at $11k?

In that scenario the bank is only entitled to $10K.  The excess would go to the owner.

What generally happens in practice is more like 90K owed on a $100K property.  The fees, etc can easily push it into the high 90s.  The spread isn't enough to justify interest from an investor, so the house goes back to the bank at the auction.  The bank would probably actually prefer that someone would put in a bid in the high 80s, but they may be vulnerable to liability that they didn't maximize return on the loan. 

In the past what would happen is the bank would put the house on the market as-is and likely accept an offer in the 80s.  It will depend on the market, but it is more typical for minor work to be done and the property may end up listed at 110K or 120K depending on the market.

@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.

@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.

@Jesse T.   I totally agree, and this is what I'm seeing at the auctions. Are the stories of people buying $100k properties for $50k myths, or rare one-offs? Before attending these auctions, I was under the impression that I could get $100k properties for $50k "fairly often".  Guess I was too naive. 

@Wayne Brooks   I wasn't aware that banks are only allowed to bid up to what they are owed.  Makes sense why some of these might go for way below market.  And you're right, I'm seeing 99% of properties sold at auction are 75% of market value - most of the time 150% or 300% of market value.  :-)

@Robert Leonard   Ok, perhaps I was exaggerating a bit with the $100k property for $10k example - but I have heard from local investors that do attend the auction that they have purchased properties for under $1000, and I've personally seen some of them buy $50k properties for under $10k at the auction.  I'm quite sure these purchases were on a 1st lien because the foreclosing party was Fannie Mae (and if I'm not mistaken, Fannie Mae only does 1st position loans).  But like Wayne said, if the bank isn't allowed to bid what's more than owed, then this makes sense why these properties would auction for way under market value.  

The $55k offer I made on the $61k house details:

http://www.realtor.com/realestateandhomes-detail/4...

The house has been vacant for 7 years, and the roof is caving in, making for more damage/mold with every rainy day.  It's not bank owned yet, it's a short sale.  Original asking price was $80k or something like that - way over priced.  My offer was for $55k, and the bank accepted originally, and then kept me on the back-burners for 2 weeks while they fished for higher offers (they updated their listing to show $61k asking price from $80k AFTER they accepted my offer).  I withdrew my offer after 3 weeks, and now the property is still on the market, for $65k.  It's the middle of winter, I doubt anyone is willing to buy a rehab project with 12 inches of snow and 10 degree weather outside.  But I could be wrong.

Originally posted by @Wayne Brooks :

@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.

Wayne-

I am not sure of Florida law but in Texas the lender can bid more than the amount owed with any surplus due to the borrower

@Bao Nguyen  In a short sale, the bank doesn't "fish for other offers".  They don't see "offers", only the executed contract submitted.  Unless of course, if it's a short sale that they then run thru auction.com of Hubzu, to "verify value".  Otherwise, your contract is the only one they're looking at, and making a decision on. And no, common sense doesn't seem to enterentrust ion any where.

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.

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.

I'm new to all this, but what if it looks like the loan was modified and then defaulted on?  What will the bank do in this case (in Cleveland area)?  Could there be any FNMA involvement?  I was looking at a past case in the same town and saw that FNMA bought the property at the full appraised value, and the minimum bid is only 2/3 of the appraised value here.  I'd like to buy my first home at a particular sale, but am trying to figure out if I would be wasting my time attending the Sheriff sale.  Thanks!

Originally posted by @Cin Ng :

I'm new to all this, but what if it looks like the loan was modified and then defaulted on?  What will the bank do in this case (in Cleveland area)?  Could there be any FNMA involvement?  I was looking at a past case in the same town and saw that FNMA bought the property at the full appraised value, and the minimum bid is only 2/3 of the appraised value here.  I'd like to buy my first home at a particular sale, but am trying to figure out if I would be wasting my time attending the Sheriff sale.  Thanks!

 If it is a decent house the bank usually sends a representative to the auction who then bids it up to the amount owed to the bank as soon as the bidding starts.

@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.

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!

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.

County owned properties are a different story. If you see on the sheriff sale list that the plaintiff is the Treasurer, then the property could go to a second sale if the minimum bid is not received. If it does not sell at the second sale, the property is placed in the county Land Bank and will be scheduled for demolition.

There is money out there to be made, you just need to perform due diligence and stick to your top price to pay for a home. Foundation issues are the biggest killer as they are very hard to estimate repair. Usually $11,000 per wall. Roofs and siding are not as hard. Finding a good contractor is key. Painting and wall repair can be done in spare time, but you need to keep track of your hours! Selling a home for a profit of $10,000 is nice until you find out you have put 50 hours per week for 4 months, then it took 2 months to sell it, while paying utilities and taxes and you end making $5/hour...

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.

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