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The opportunity to buy a residence at a discounted price makes this kind of investment very attractive, particularly in a rising real estate market. At a recent sale, 52% of the auctions sold at final bids below 80% of tax assessor value. As an example, market value on one property was calculated by the Tax Assessor's Office as $118,385. The winning bidder paid $94,100. Another example, market value $52,276 ... final bid $25,434. And, the Oklahoma County Tax Assessor says that 95% of their values are below actual market value!
Some investors buy then sell as quickly as possible, or 'flip' the property for profit. Others intend to hold the residence as a rental property. If one has the cash, the Sheriff's Foreclosure Sales is an excellent way to make money.
If you don't have the cash, you may be able to contract to buy the property from the homeowner before the sale, then sell your contract to an investor for a profit. We are conducting "Foreclosure Sale Workshops" which include techniques for this profitable activity; how to contract with the homeowner ... how to find investors.
As profitable as this may be, there is no free lunch. There are risks to be considered, different from a normal real estate purchase. To understand these risks, the following compares the two processes.
Before you sign a contract in a normal real estate purchase, or hold up your bidder number card at the Sheriff Sale, you will want as much information as possible about the proposed purchase. This is absolutely vital. In a normal buy, the seller and agent are required to give you a great deal of information and disclosures, as well as the opportunity to inspect the property. The Sheriff's office gives very little information about upcoming sales. Fortunately, much data is available to the public about every real estate parcel in a county, but some critical information, such as interior condition of the property, may not be available. There are ways to minimize it, but the risk of buying unseen problems is a real one.
The Commitment For Title Policy Insurance available in a normal sale gives you assurance there will be no title problems. It is not practical to buy such commitments for your possible targets at a Sheriff Sale. First, about a third of the listings are recalled before the sale and this can happen at the very last minute. Second, you won't know until during the bidding process if you are willing to top the last bid. So, you may go to the sale with ten possible targets and only one or none is actually bought. Commitments are too expensive to buy for all possible targets.
One defense to a foreclosure is the lender's failure to give proper notice to all parties. Although it is slight, there is a risk that something wasn't done properly and there will be title problems. This is a slight risk because of the process itself. Foreclosure is slow, taking from three to eighteen months, and it is expensive. Lenders want their money invested and earning interest. Foreclosure is the absolute last resort, to be avoided if possible. To protect their interests they will require their attorney to rigorously follow Oklahoma foreclosure procedures. Also, you can minimize this risk by your own research of available title chain and foreclosure documents, or purchase lower cost Title Reports from a reputable title company.
You will want to be especially vigilant about property taxes, municipal liens (weeds, mowing, condemnation, etc.) and IRS tax liens. These liens are not extinguished by Sheriff Sale and you need to know about them. If an IRS lien exists, the lender is required to notify the IRS of their pending action at least 25 days before the sale. If they have properly and timely advised the IRS, the IRS has a period of 120 days after the sale (Confirmation Hearing) to seize the property to satisfy the tax lien deficiency. In that event, you as the buyer would be entitled to your money plus annualized interest. If they do not seize within 120 days, their rights to the property expire. Of course, you want to be sure of the IRS notification before the sale, and could not sell the house during the 120 day period.
Finally, there is the risk you will have trouble getting the homeowner out of the house. This family has probably been living in denial of reality for many months. It is a traumatic experience to lose your home, the money invested and memories associated with that home. I have interviewed many homeowners before the sale and almost all believed they would be able to avoid foreclosure ... yet at least two thirds did not. Sometimes a family has no money to buy or rent another residence and simply refuses to leave. Although as the legal owner you will be able to have the Sheriff forcibly evict them, the risk is this may take another month or so before you take possession, and there may be damage.
Understanding these risks and getting good legal advice are the ways to minimize them, and many people find the risks acceptable considering the reward. After all, at the Confirmation Hearing before a judge two or three weeks after the sale, the investor receives the deed, free and clear of all liens and encumbrances (except as explained above). That investor now owns a property probably worth a lot more than the investment.
If you are willing to accept these risks, the first step is to get as much information as possible. Our Foreclosure List service can help save a lot of time and simplify your screening to find desirable targets.
Good Investing!
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