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When a default occurs, the lender will attempt to end the homeowner's rights of possession to the property. The lender must file suit and prove in court that it has the right to sell the property to recover its loss by virtue of the default and as stipulated in the signed mortgage agreement. If awarded a final judgment from the court, the lender will proceed with the foreclosure and the property will be scheduled for sale.Foreclosure properties are sold at public auction under the direction of the court in the county where the property is located. The successful bidder becomes the new owner of the property. About 80 percent of the time the successful bidder is the lender, the original mortgage holder. Attorneys will be there to bid on the property for the lender. There will also be investors, onlookers and curiosity seekers observing the proceedings. Occasionally, a lienholder will appear trying to salvage what he can from his claim. Rare but certainly possible, the homeowner may show up to bid on his own property. Advantages of Buying Foreclosures at the Sheriff's Sale The biggest advantage to buying properties at the Sheriff's sale is the high profit potential. If there is a large difference between the market value of a foreclosed property and its final judgment amount at auction, you can really win big. Typically, the largest cash rewards come from the proper application of this investing method. Sales are usually advertised 4 to 6 weeks in advance. In some states, this information may be available 6 to 8 months or more before the sale. This gives you ample time to research the property, the condition of the loan and the condition of the homeowner. Why the homeowner? If you can work out a satisfactory arrangement with him, you can save yourself the trouble at the auction. If you meet with the owner and can't work out a deal, you should at least take careful note of the property's condition. This gives you a competitive advantage over other auction bidders. You can go to the courthouse and observe the process as often as you like before going to bid on your foreclosed property. It's certainly a good idea to familiarize yourself with the auction process. There usually isn't much competition for foreclosed properties sold at auction. Sometimes no one shows up to bid on a property, perhaps due to transportation problems or inclement weather. This creates fantastic opportunities for the diligent investor. Disadvantages of Buying Foreclosures at the Sheriff's Sale Buying foreclosed properties at the courthouse can be very dangerous for those who do not do their research properly. Horror stories abound. The large cash outlay required to buy foreclosed property at the Sheriff's Sale is the biggest deterrent for most buyers. Certified checks and sometimes cash will be required to bid on properties. You may have to pay off the sale amount within 30 to 90 days. In some states it's a matter of only days. In Palm Beach County, Florida, the successful bidder must pay for the property in full by 3:00 PM on the day of the purchase. That's just 6 hours from the time the bidding starts to the time you must pay for the property in full or risk losing your cash deposit. You may not be able to inspect a foreclosed property before bidding on it. In that case, there is little chance you will be able to assess the property damage and replacement costs. This hinders your ability to determine the true market value, your maximum bid amount and your profit. If you are the successful bidder, you may have to evict tenants currently residing in your new property. This could take several months. This also interferes with your plans to repair and quickly sell the property for a profit. This delay increases your carrying costs and erodes your profits. There may be land use problems with a property such as zoning or environmental issues like petroleum contamination or toxic waste. A clue to avoiding a problem property is when the lender's representative fails to appear or bid on the property. If the lender doesn't want it, you don't want it either. Failure to research a property correctly leads many to overbid. Too often properties are purchased for much more than their value. This accompanied by "auction fever," the tendency to get caught up in the heat of the moment and overbid, results in large over-payments and even larger losses. The most important concern perhaps is the possibility of other liens or judgments. As the successful bidder, you replace the homeowner's position in the property. Any problems clouding the title are your problems now. This includes other mortgages, mechanics' liens and taxes. At the sale, the first lienholder can nullify all other liens if he's the successful bidder. Junior lienholders must buy out senior lien positions and be high bidder to gain possession of the foreclosed property with clear title. The first mortgage holder is not the only one foreclosing properties. If a third lienholder forecloses, the process will not wipe out the first and second lienholders. Buying this property means you buy these liens as well. Typically, first mortgages are the largest liens on the property. Researching Foreclosed Properties Follow these steps to ensure you research the properties thoroughly:
If you cannot inspect a property, leave yourself a little extra room and some extra cash.
Locate any other liens or judgments and subtract those amounts from your previous figure. Paying off the liens at a discount is one way to increase your profits, assuming you are the successful bidder.
Your subtotal so far, is your expected sale price of the property, less repair expenses, holding costs, liens and closing costs. This is the "net to you" after you sell.
Deduct the default or final judgment amount from your last subtotal. This is your gross profit potential, hypothetically the most you can make assuming all goes well.
Buying Foreclosures at the Auction
Never bid more than your pre-determined amount.
Experts agree: If you are unsure about the property, don't do the deal!