Buying At Sheriff’s Sale – A Good Idea?

By Doug Owens

People sometimes ask me whether it is advisable to buy real estate at a sheriff’s auction, and I always say “It depends.” A sheriff’s sale happens when someone obtains a judgment against someone who owns the property and the court orders that judgment be foreclosed and the property be sold to pay the judgment. A foreclosure and sheriff’s sale wipe out the liens of any creditors whose liens are junior to the lien that is foreclosed. So if there are senior liens the purchase may not make economic sense. But if there are not senior liens, the first kind of risk in buying at a sheriff’s sale arises.

That first risk is the risk of redemption. At the sheriff’s sale, the successful bidder has acquired the right to wait out the one-year redemption period before he or she can obtain a deed to the property. During the redemption period, the judgment debtor has the legal right to redeem the property from the successful bidder by paying the amount that was paid at the auction plus any additional costs the successful bidder has incurred since then such as taxes. In addition any junior lien holders whose liens were eliminated by the foreclosure can also redeem from the successful bidder in the same way.

One way to counteract this risk in some cases is for the successful bidder to approach the judgment debtor and pay for a deed to the property and the assignment of the debtor’s redemption rights. If the debtor has no reasonable hope of coming up with the money to redeem then he or she may be willing to enter into such a deal. A successful bidder could also approach any junior lien holders and attempt to buy their redemption rights at some discount to the amount owed.

Assuming that the successful bidder is prepared to wait out the redemption period or purchase the redemption rights, then the question of title insurance arises. If the buyer at the sheriff’s sale intends to keep the property for a long-term hold, then the title insurance risk becomes slightly less important than if the buyer intends to rehabilitate the property and sell it. This is because

from the title insurance company’s perspective, the sheriff’s sale does not provide the buyer with an insurable title interest and the company will generally not issue a policy of title insurance under such conditions. Since the successful buyer at the sheriff’s sale can only pass on to his or her buyer, in turn, the same title that he or she has obtained, it will not be possible for this ultimate buyer to obtain title insurance, either, and then the property will be practically unmarketable to a retail buyer.

This problem is not necessarily fatal to the investor’s objectives as long as an immediate sale of the property that was bought at the sheriff’s sale is not an indispensable part of the investor’s exit strategy. The title that the successful buyer at the sheriff’s sale will obtain once the statutory redemption period has elapsed is enough to give “color of title” to the buyer and thus if the buyer occupies the property and pays the property taxes for seven years, the title will mature into one that is insurable. From the title insurance company’s point of view, it is a situation of adverse possession by the successful bidder at the sheriff’s sale against anyone who would claim the property under a superior title. Such a person could be one who was shown as an owner in the land records but who did not receive notice of the underlying judgment that resulted in the sheriff’s sale or the sale itself and could attempt to have that sale legally set aside by a court. An insurance company will ensure a title obtained through adverse possession once the applicable statutory period has elapsed and for an occupant under “color of title” such as a sheriff’s deed, who pays the property taxes that period is seven years. So the answer to the original question is “it depends.”

The foregoing is intended to be educational and is not to be considered legal advice.

About the author...

Doug Owens practices real estate law and general business law from his office in Anacortes. He offers a 20% discount for REAPS members and he can be reached at (360) 299-3990 or [email protected]

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