Why Buying Properties at Sheriff Sales in Minnesota is a Bad Idea
There is so much information out there in books, television, and seminars about buying properties going into foreclosure. Many “experts” recommend that you buy the properties at the sheriff sale or “on the courthouse steps”. There may be great opportunities in other states, but in Minnesota, buying properties at the Sheriff sales is typically not a good idea and it can turn out to be a terrible situation. Here’s why:
At the Sheriff Sale:
You, as the investor, would need to show up at the Sheriff sale with the entire amount of the outstanding mortgage amount to “buy” the house. The foreclosing bank would be excited! Unfortunately, you do not receive the deed at the sheriff sale (and therefore do not own it). You will receive a certificate of redemption. After the sheriff sale, you will enter the next phase, which is:
The Redemption Period:
In Minnesota, the owner of a house in foreclosure has 6 months after the sheriff sale to “redeem” the property by securing new financing and paying off the bank that foreclosed on the property. This is not the area of concern, because if the owner secured new financing, you would simply receive your investment back. The concern is that during the redemption period, the owner still has full use of the house. They can remove all the cabinets, the furnace, and even plumbing pipes. They could kick holes in all the walls and doors. At the end of the redemption period, the bank (or the investor) receives the deed to the house AS-IS. That cute house could now be a rehab nightmare. You just overpaid for a destroyed house.
Alternatives:
1. Wait for the house to go into foreclosure and for the bank to own it. In Minnesota, 99% of all bank-owned property listed through real estate brokers and can be found on the MLS. Buy it then.
2. Contact the homeowner directly and work with them to sell the house to you in a short sale. You way want to work with a qualified Realtor that is experienced in handling short sales as there can be many speed bumps along the way.
is it illegal to remove a furnace from your (formerly) house in the redemption period? seems like quite a scam..
Nope. You legally still have all the rights as the owner of the house. You could paint it pink, remodel it, even sell it.
It doesn’t happen often, but I do see it. Usually it is not about the materials (furnace, cabinets, etc), it is about the owner being frustrated at the system/bank and wanting “to show them”.
Rumor has it that they bank can sue the owner for the damages, because it does violate the clause in the mortgage that you must maintain the house in livable condition, but I can’t imagine the bank ever does that as they are already taking it back.
This is great advice. You articulated in plain terms why buying foreclosed property in Minnesota is risky.
Yes, it’s true that there is a risk of “overpaying for destroyed house” when buying at the sheriff sale. But if you are buying a house pennies on the dollar – I agree that not every house that goes into foreclosure would be a good investment – then this scenario may not be that bad. Especially considering the fact that most REOs are sold close to market value – there ain’t that many true bargains there, i.e. pennies on the dollar type of deals.
Buying at Sheriff sale is MN is a great idea under a very narrow set of circumstances. What is more interesting and useful is buying an assignment of the Sheriff’s certificate of sale from the foreclosing lender, which is typically the highest and only bidder at a Sheriff sale. An assignment allows you to see if the lender underbid (meaning bid less than the actual amount owed in an attempt to interest parties in purchasing redemption rights or redeeming as a junior creditor pursuant to Minn. Stat. 580.24. In short, unless the owner is dead, missing in action, the property vacant, there are no junior liens which can be bought via an assignment and used to redeem the property and in this case where the owner simply will not deal with anyone (which is not uncommon at all) there is no reason to buy at a Sheriff sheriff. Better to conserve capital and turn 6 deals in the same period of one full run gamit of foreclosure. Side note: If any lenders or foreclosing attorney for lenders in MN reads this, here is a TIP: IF YOU ARE GOING TO UNDERBID YOUR CLIENT’S MORTGAGE AT THE SALE (i.e. 750K owed, and you bid 250K) INCLUDE THAT LANGUAGE IN THE ADVERTISEMENT AND MORE PEOPLE WILL SHOW UP AT SHERIFF SALES. (ideally, your clients would just assign the mortgages and let an investor reforeclosure at the full amount insuring they get back the property. Just my two cents worth.
So i have a one for you… What if a short sale negotiator tries to redeem the property after redmeption has expired. They filed to redeem about a month ago, however never redeemed the property. What happens in this case?
I would guess that redemption is null and void.
I have a short sale offer on a house that we just found out is 3,000 under what the seller owes plus they pay 5,000 of the closing costs. Do you think this is a decent offer for the bank to accept? Our offer was finally submitted to the bank two weeks ago after after 4 months of negotiating with the seller. The sheriff sale was last week. Will the process drag out longer due to it already having the sheriff sale? The bank is Wells Fargo.
Any info would be helpful.
Absolutely. The bank would be stupid to only loose $8k on this deal instead of letting it go to foreclosure where they will lose tens of thousands. Keep in mind, though, that banks will do stupid things that make no sense!
My husband and I made an offer on a house on January 3 that has two liens-(80/20 – with two different lenders). Four days after we made the offer, the house was sold in a sheriff’s sale (Our realtor thinks that one of the lenders bought out the other). The listing agent did not tell our agent until a couple of days ago. The owner did not want to sign our purchase agreement unless the bank would agree to forget the balance…The house is now in its redemption period.
Would you advise my husband and I to move on and look else where? How low could this possibly take?
D. Braaten
This is technically a short sale. It it not uncommon for the owner to wait until the sheriff sale as it will get rid of some liability for the seller. I would still pursue it, but short sales can take months and eventually never close.
I need advice! We made an offer on a short sale in July 09. Our realtor checks in regularly with the listing agent to see if our offer was accepted by the bank but we are still waiting (9 Months now). I did some digging today to find that this house went up for sheriff’s auction in Jan. The bank bought it. The owners are moved out but there is a 12 month redemption on it from the date of the sheriff sale Jan 10. I found all of this today. Our Realtor and the listing agent never told us any of this was going on. What is going on here? Should we just walk away? This was such a beautiful house–our dream house really. I’m trying to get educated quickly here but I don’t know what to do next.
In my opinion, your agent should have been in tune a little more with how the transaction was progressing. See if they are still working on your offer. A short sale can be done anytime up until the end of the redemption period. The redemption period is typically 6 months long. I can be lengthened to 12 months if the property is farm related.
Update on our above situation. We heard back on our approval from the bank (Wells Fargo) on Friday. 60 days, or 45 business days, After the package was submitted to the bank. This makes a total of 6 months after our initial offer was submitted to the seller. The bank took a blow of 3,000 from our offer, 10,000 for the agents commisions and 5,000 for our closing costs totaling at 18,000 below what the seller owed.
It is amazing how long it takes, isn’t it!
I have a cousin that allowed his property to be foreclosed on, but something he told me doesn’t make sense.
Basically, he said that when the property went to a Sheriff sale it sold for $130K, but then the property was later sold via short sale by my cousin (I assume during the redemption period) for $165K. He has told me that even though the mortgage balance was above $165K, the mortgage company was only entitled to get back what they paid at the Sheriff sale. Is he correct, or just going to find himself in trouble?
Can I assume he’ll have to pay income taxes on what he “profited” as well?
The bank only gets back what they paid at the sherriff sale. They can always come after your cousin for the deficiency.
Hard to say on the income taxes. You will need to check with a CPA.
We have an opportunity to file an intent to redeem on a house that is currently in the foreclosure redmeption period. (We were able to obtain this right to redeem by buying the junior lien-holder’s rights and having those rights transferred over to us) Our question is how do we obtain financing? We assumed that a traditional mortgage would be able to be applied to the purchase, but we are finding that the lenders we have contacted are telling us that we can not use a traditional mortgage. Any ideas?
You may need to use a hard money lender to buy the house and then turn around and refinance with a traditional lender after you own it.
Thanks Scott. That is pretty much what the consensus is when I ask.
Question 1) Do you have any resources/leads of hard money lenders?
Question 2) We are not planning on flipping this home, but get a hard money loan, then refinance and live in it long term. How long after the initial purchase can you do a refi?
You can refi after 6 months. Craig’s List is a great resource for finding hard money.
I received more info from our lender. He said the reason they can not do a traditional mortgage is that there is no purchase agreement. Since we are redeeming an interest in the property vs. purchasing it, one is not required, but is there any reason why we couldn’t draft up a purchase agreement and have the bank as the seller and owner sign off on it?
Thanks for your input.
there was property with a mortage of $226,000– sold at Sherriff sale for $145,20 ( bank bid $145,000)-purchased by private individual– Owner is now going to redeem and sell for $170,000- does the bank have any recourse since they were not the buyers at the Sherriff sale ?
If this is in Minnesota, no, the bank’s right is to do the foreclosure and that is all they get.
Thanks for your reply—,the owner is going to redeem and sell to another party–does he need to redeem prior to selling to the second party or can he use their money to satisfy the redemtion (redeeming after the sale)–keeping in mind that the property was purchased by a private individual
No. That can be handled at the closing. The title people get the pay off for buying the certificate and then do the deed transfer all at the same time.
There was a property with the 1st mortage of $210K, the 2nd mortgage of 55K. It was sold at the Sheriff sale to the 1st mortgage lender for $175K. The owner is my friend and willing to sell it to me during redeem period. How do I proceed the purchasing? Can I offer under $175K? Will the 2nd mortgage have a lien against me or the property or the owner? Thank you
This depends upon what state you are in, but you simply have to buy the redemption certificate from the sheriff. You may want to get an attorney involved to insure this goes correctly and your friend doesn’t become your enemy.