Real estate investors often look for any opportunity they can find to save a little money on their next investment. Whether that means buying short sales or even more challenging scenarios, like buying at a sheriff’s sale, it’s good to fully understand what you’re getting into before you buy that property.
What is a sheriff’s sale?
A sheriff’s sale is a type of real estate auction where a property that has been repossessed is auctioned off as part of a court-ordered process to clear up judgments against the prior owner of the property. Generally, the sales proceeds are used to pay back creditors like mortgage lenders, banks, and tax authorities.
You might hear about a property being auctioned off “on the courthouse steps.” This is a classic sheriff’s sale. They are announced beforehand using local (and sometimes national) media outlets, including newspapers and online venues. Buyers then arrive at the given time, place their bids, and someone walks away with a promise of a deed to a piece of residential real estate.
What is a redemption period?
When a property is auctioned at a sheriff’s sale, there is generally a period of time during which the former owner can buy their real estate back, known as the “redemption period.” During this time, which is often up to a year or more, the former owner can reappear and satisfy the conditions that are required to have their real estate restored to them.
These terms usually involve clearing the liens that resulted in the initial sale, either with another loan or through a cash redemption. This is generally a significant amount of money, so the chances an owner will actually exercise their right of redemption is fairly low. However, they can also file paperwork to stop the sale during this period if the sheriff’s sale was not announced properly or other serious mistakes were made.
Use caution when investing at sheriff’s sales
Because of the redemption period, it’s important for real estate investors to be willing to wait out the period between the auction and the date they take physical possession to begin any improvements. The risk of losing the value of any improvements to redemption exists. Technically, you don’t have a clean title to the real estate, so you can’t prove your exclusive ownership for other purposes.
You won’t be able to get a loan against the property because the title you have is considered “clouded.” In plain terms, there’s no way to guarantee that someone else can’t come in with a prior ownership claim and take all or some of the property from you. Again, the risk is minimal, but it’s not zero.
Many times, real estate sold at a sheriff’s sale is purchased by the very bank that is foreclosing on it. This is due to a couple of factors, but the most important one is that a lot of times, people just don’t show up to these sales. They’re often at inconvenient times and require you to put up a great deal of cash upfront immediately before you can even access the property to assess its value.
How to take title to a sheriff’s sale win
On the off chance that you do find a property you’re willing to bid on at a sheriff’s sale, know that it will be sight unseen, which limits your due diligence. You may be forced to evict some really angry people who could later turn around and redeem the property away from you. You’ll need to retain a lawyer to help speed up the process of gaining a proper title.
You could wait seven years for a court to eventually grant you adverse possession. Or you could do something more practical while you wait out the redemption period: You could file a quiet title action with the help of a real estate lawyer. This is a process that clears any potential clouds off the title of your newly won property.
You still have to honor the redemption period in your area, but the quiet title lawsuit means that once that period is up, you will be able to get title insurance, offer the property for sale, safely remodel or bulldoze any structures, or borrow against the property. It’s the most effective way to uncloud your title and make your sheriff’s sale real estate purchase profitable.
