Should I buy a property at the County Sheriff sale or wait until it becomes an REO?

A question I'm often asked is whether or not a buyer interested in a property that is being foreclosed on should buy it at a Sheriff's sale or wait until it becomes an REO (Real Estate Owned by a bank or lender.)? There are some definite caveats to purchasing a property at a Sheriff's sale which I discussed in an earlier post that buyers need to be aware of, but we can explore the question further.

The main motivation for a buyer asking the above question really revolves around whether or not they can get a better deal on a property if they buy it at the county sale vs. waiting until it is foreclosed on and eventually comes out onto the market and is listed by a MLS participating broker. While this of course depends on the debt on the property, in most cases these days the answer seems to be that it is far more advantageous to purchase a property after it comes out onto the MLS. Why is this? The answer is that most properties at the Sheriff sale are bought by the mortgagor (lender) for the debt owed on the property, which because of declining values in the current market and inflated appraisals and equity stripping of past markets, is almost always higher than the current market values. Add to this all the dangers of purcahsing real estate site unseen and in this market it makes the most sense to wait.

In order to illustrate this I went and pulled some Sheriff sales off the Polk County Iowa Sheriff sales past sales records. I'm using Polk County data for this report because Polk County has the best historical sale data on their website. I choose eight properties from various cities around the metro. Seven out of the were listed for or sold for less when put on the MLS. In one case, that of a condo in Urbandale, it was listed for more and is pending. Townhomes and condos are one area that is a little safer and might offer opportunities for discounts at Sheriff sales as buildings are maintained by the association and units are easier to value because there are often many similar units to compare the subject property with. Let's look at the list below and the MLS data:

As you can see from the above examples buyers would be able to capture discounts on the average property from $16,000 to more than $80,000. Although I found one case where a MLS property was being sold at a premium it is the rare exception rather than the rule. In most cases it makes far more sense to buy the properties at market rather than the Sheriff sale. Banks will purchase the property at the sale for the inflated debt values and then mark them to market prices, in some cases absorbing the loss, but in other cases they can recover deficiencies from PMI (Private Mortgage Insurance), the Federal Government through mortgage backed loan guarantees, or from the borrowers in the form of deficency judgements. So my advice to buyers in almost all cases is to be safe, buy off the MLS and get a discount.