Foreclosures & Tax Deed Sales – Bait for the Next Wave of Speculators

If it were really so easy and profitable, everyone would be doing it.

August 21, 2007 – Palm Coast, Florida – During the 2002 to 2005 run-up in real estate values, the speculator was best represented by the “flipper.” In the extreme, these were otherwise rational people who somehow morphed into someone who would buy a property for $50,000 more than the seller paid a few months earlier on the assumption that the person in line behind them would do the same. This worked for some in the rising market but when the music stopped, many were left standing.

In today’s depressed market the speculator’s target acquisition of choice has become property sold for back taxes or at foreclosure. While a few will do well with this strategy, most will not. There are too many dangers for the casual participant. Only those who truly understand the term “due diligence” have a chance. Tim McGee, an industry insider, says those who succeed are among “the optimistic few who are willing to dig through a roomful of horse manure because they are convinced that somewhere in there is a pony.”

Opportunities are available during each of three stages of foreclosure:

1.  The first stage begins when the lender files a notice of foreclosure (a lis pendens) signaling that they intend to foreclose on the property, followed by the default judgment. During this phase, prior to the foreclosure sale, the property is considered in pre-foreclosure. Defaults are filed at the courthouse and, as public record, can be found there. If you know the property owners name, you can find lis pendens filings at the county clerk of courts website.

During pre-foreclosure, you can approach the owner with an offer to buy their property. But remember, the bank will not want a sale that nets less than the payoff amount of the loan. By working with the seller and with the loss mitigation department at the bank, it is sometimes possible to arrange a “short sale.” A short sale is where the sale amount is less than the debt, with the consent of bank. If the bank thinks they can get the balance of the loan over time from the seller, they will pursue that option. If not, they typically write off the balance. Some Realtors® have taken the time to learn the short sale process and have the necessary contacts with banks. Be sure you work with a Realtor® who has.

2.  The second stage is the foreclosure sale itself. This is an auction, held at the county courthouse. The plaintiff (lender who foreclosed) will have a representative at the auction authorized to bid up to the defaulted loan amount or to a lesser amount if the lender feels the property is worth less than the loan balance. An outside bidder’s best opportunity is when the delinquent loan amount is significantly less than the property value.  

3.  If the plaintiff ends up taking title to the foreclosed property, it becomes a REO (Real Estate Owned) property and will be listed as such. Your Realtor® can search MLS for listings in that category. Properties that are well maintained will sell at or near market value – no bargains here. Many REO properties suffer from months of neglect. While they will typically sell for less than market value, buyers need to assess the risks and repair costs thoroughly before making an offer.

Tax Deed Sales – Tax deed sales are an entirely different animal from foreclosure sales. Unlike a foreclosure sale, tax sale properties do not usually have a long list of liens against them. While foreclosure sales are typically properties owned by owners in financial distress, tax lien sales are usually the result of neglected ownership. More often than not, they are properties forgotten (e.g. an uncle dies and the family has no idea he owned a piece of property in Florida). Chances for a bargain are greater here since the encumbrance may be much less than the value of the property. By the same token, the property is more apt to be a lot than a dwelling since more valuable properties aren’t as likely to be forgotten by the owner. If there is a large mortgage against the property, the mortgage holder probably would have foreclosed before the two-years wait period required for a tax deed sale.

The buyers exposure when buying at a foreclosure or tax deed auction is that there are so many potential pitfalls:

• If the owner is still living in the home, eviction proceedings may be necessary to get them to vacate.
• Some auctions are cancelled at the last minute when the default is cured or if the property owner and bank make other payment arrangements.
• Properties are sold “as is.” Sellers are not required to disclose defects.
• If the owner is in default on a mortgage or property taxes, it’s likely that other claims also exist against the property.
• If the foreclosure plaintiff is a second mortgage holder, the buyer assumes the obligation of the first mortgage. The change in ownership could trigger a call for the entire balance of the first mortgage.

If you are still inclined to adventure into this realm of real estate, the need to do a thorough job of due diligence up front cannot be overstated. Gems can be found, but only if you are willing to spend a lot of time researching the opportunities. Be prepared to spend hours inspecting court documents. Watch out for the companies that advertise that they can teach you how to make millions on foreclosures or tax sales. And don’t proceed without getting some advice from a real estate attorney.