Although I’ve taken courses on how to buy deals at the sheriff sale, I must say with full disclosure that I’ve never attended a sale. Usually, my firm and I are at the other end of that sale, represented by our foreclosure counsel whom we’ve provided with bidding instructions to represent our interests.
I remember when I took one of those courses on buying assets at the sheriff sale, my buddy, the instructor, asked what I was doing there, and I said, “I want to know what you guys do and think at the sale.” He laughed and proceeded to give me a lot of great information. He covered not only what to do at the sale as an investor, but also some things to do prior to getting to the sale. Also, he described how things worked in the county where I’m from, which was helpful since the process is often county-specific.
It was this discourse with him that really made things click for me. Although many people find good deals by attending the sheriff sale, I realized that other strategies could be employed as well, such as purchasing prior to or after the sale.
To be quite honest, I was never really a big fan of bidding war situations. Whether it’s going to a foreclosure, attending a tax sale, or having multiple offers submitted on a rehab deal, bidding wars are never fun. I’m always wondering if I paid too much. Instead, I prefer off market deals — or even more so today, just buying the non-performing note.
For me, although there can be multiple buyers bidding on notes, it seems that there are fewer players in the space, especially with larger-dollar trades. Larger outfits who are purchasing institutional loans from banks need to be vetted and deemed compliant.
But when you’re buying the note, it seems that you’re ahead of the people bidding at the sale, the rehabbers, and even the “I buy houses” folks.
Once you buy the loan, becoming the lender, you would be one of the first to know if that property was to go to foreclosure or be sold. For example, if it’s a vacant first lien and the homeowner has no interest in keeping the property, the more common exit strategy may be though the property (i.e. foreclosure, deed in lieu, or REO). As the first lien holder, you would be the one driving that process.
Besides buying the non-performing note, here are few other strategies for avoiding competition as much as possible, whether you’re buying before, at, or after the sale.
Buying Before the Sale
Another strategy that is often overlooked is buying the asset prior to the sale through the bank’s foreclosure attorney. We’ve been able to pull this off on several occasions, especially when our attorney, who is representing us as a junior lien holder, reaches out to the counsel for the senior lien and suggests that they save the time and money of going to the sale and just sell the asset to us for the opening bid amount.
Bidding at the Sale
When it comes to attending the sheriff sale, we’re more concerned with controlling the sale than with simply bidding at it. When our strategy is to take the property back, our attorney would start the bid off at a higher number. If that’s not our strategy, he/she may start it out at a lower number (that still protects our interests as the lien holder). There are a few considerations, though, including what we think the property is worth, what it might sell for as an REO, if we need to recapitalize, etc.
If you’re showing up to bid on a property, it’s important to do your due diligence ahead of time and know the maximum amount you’re willing to bid. You may want to look at the title, as well as the ARV (after repaired value), which may be tougher to nail down.
If the bank doesn’t know how much the property is worth due to faulty data or if they need the asset off of their books, it may be a good opportunity for the real estate investor, especially if not too many other bidders show up to the sale.
Purchasing the REO
Of course, the other option is to just buy the REO (real estate owned) property from the bank.
This strategy tends to make more sense to me, especially since I can usually get inside the property to get a better idea of actual rehab costs (you normally can’t get into a property that you’re bidding on at the sheriff sale). Also, I’m getting an insurable title and often the ability to get a reduced or re-issue rate on the title policy as well.
The only challenge with trying to buy the REO is the bank is sometimes slow to respond (as they are always trying to encourage multiple bids). They always want your “highest and best” offer, and it’s really all about what they will net on the deal. They like a solid deposit (often at least $2,500 for investors), and they prefer to close quickly with as few contingencies as possible.
For me, I would do whatever possible to facilitate the deal going through. For example, I would try to get to know the listing agent, as well as make it easier for him/her to sell to me by showing that I understand the process for REOs ahead of time. Another strategy I utilized as a licensed realtor was to provide the bank with more incentive to accept my offer by foregoing my commission on the deal, as that would increase what they net from the sale.
I’m sure there are many other strategies for avoiding competition, whether you’re purchasing before, at, or after the sheriff sale. And so, I’d love to hear a few from the BiggerPockets community.
When is your favorite time to find a deal? Or what are some of your favorite strategies to beat the competition in your market?
I’d love to hear your thoughts with a comment!