Fortunes have been made and lost at Philadelphia’s tax and mortgage foreclosure sales… if you’re not prepared, you’re sure to lose.
Going to a Sheriff Sale in Philadelphia is actually a pretty interesting scene. It would probably make for great reality television.
Just before the opening, the security line at First District Plaza backs up about 80 – 100 people deep in two lines. This is a great place to survey the scene of attendees: attorneys representing lenders, some homeowners that may be faced with losing their home and mostly investors and want-to-be investors there to find their next deal.
Once you’re inside and the action really begins, you get a sense that there’s a club of insiders here. In a room of maybe 500 people at any given time, the pros that are there 4 times a month mostly know each other. If you pay close attention, you can see small nods and knowing glances traded around the large, plain room. It feels a bit like being on the floor of the stock exchange and everyone else has inside information.
There’s no big secret to getting a list of property to be auctioned in advance. It’s clearly posted on a newly updated version of the Philadelphia Sheriff’s Office website, which is a big improvement over the last version of the site. You can drive by, figure out what property is worth and drill down on the ones that you like, but you’re still not fully prepared.
I’ve spoken with dozens of smart real estate investors that steer clear of the Philadelphia Sheriff Sale. Most of them have been burned in the past and if you talk to the pros that buy sheriff sale properties regularly, everyone has been burned at some point.
“It’s a calculated risk”, said a regular sheriff auction buyer that I spoke to that asked to withhold his name. “We know the sheriff is supposed to stand behind it but the reality is, you lose a little here and a little there. It’s a cost of doing business, as long as you don’t eat it big anywhere and do volume. Just do your homework.”
What he’s referring to is the debt, judgments and liens that hang on a property after auction and the risk of right of redemption. The sheriff’s office warrants that all property is sold ‘free and clear of liens and encumbrances’. The practical reality of this is much uglier. Here are 3 very common things that happen and ways to cover yourself (by ‘common’, we mean almost every property sold, not kidding):
- A guarantee is only as good as the people behind it:
Here’s a very common scenario:
Property goes up for sale at auction and has a list of judgments and liens other than the taxes or mortgage it’s being sold for. Some are to other city departments like licenses and inspections (L&I) or revenue. The sheriff has these listed on the distribution list, meaning they plan to pay these liens with the money they get from you – the buyer – at sale. The sale is over, the sheriff gets the money and eventually they pay. But they make a mistake and pay the wrong department. For example, they send a check meant for L&I, to revenue instead and the check is simply made out to ‘City of Philadelphia’. Revenue deposits the check but has no record of what account is credited because there is no amount due. L&I is the department that’s owed money and they never get it. Time goes by, you bought the property and now you go to sell it or finance it. L&I isn’t going to remove their lien, they never got paid. The sheriff’s office says they can see they made the payment so there’s nothing they can do and revenue has no idea where the check was deposited or how to find it in the system since they don’t even have a record for anything to be paid off.
It sounds like a bad comedy routine but it’s a very real scenario that happens everyday. City departments simply don’t communicate with each other and they operate like completely separate entities. L&I doesn’t care what the sheriff’s office says, if they don’t have their money, they’re not letting it go.
You may or may not have to eat it. If you can get this mess untangled, it’s going to take a lot of time and at least a few trips to the sheriff’s office and revenue to straighten this out. Time is money and depending on how much the lien is, it may be worth it to just pay it and move on.
If you know what these judgments and liens are before you bid and buy, you at least know what you’re in for and the chances of a problem. It won’t necessarily stop it from happening, but there’s a built in cost here. Sheriff sale properties with more liens and judgments at the time of sale are going to cost you more in time, effort or swallowed cost to clear these things up after the fact. We’ve studied thousands of sheriff sale properties before, during and after the sale and not having this problem is rare.
If there are 10 properties that you like and want to go after and 3 of them are relatively clean of liens, those are the ones you should target the most. It’ll save you tons of time, reduce your risk and at some point probably save you real money. It’s also a strategy that may have you bidding with less competition.
- Check the distribution list:
For mortgage foreclosure sales, the distribution list is a list you can get from the law firm that represents the foreclosing lender. You’ll probably have to call them before the sale and most will put you on a regular email list. This lists all of the liens and judgments that are planning to be paid off with the money from the sale. You can also get the list of all creditors and lien holders that have been notified of the sale.
Get this list. Know this list. Do a search of title and compare this list to judgments and liens that are of record. Know if there are any that are not planning to be paid off, they may end up being your problem if you buy. If a creditor wasn’t notified properly, their lien may not just disappear with the sale and you as the owner may have a big problem.
This type of thing happens much less than #1 because the law firms that handle foreclosures for lenders tend to be better than the city. But it does happen and when it does, don’t count on a small loss. If you know what you’re doing, it’s fairly easy and inexpensive to avoid.
- Right of redemption:
There are two reasons a property ends up at the Philadelphia Sheriff Sale:
- Delinquent taxes
- Mortgage foreclosure
Tax sales are much trickier because of 2 reasons:
- Proof of service
- Right of redeption
Proof of service means that the owner of the property was properly notified that they were about to lose their property. Law firms do a good job of this for mortgage foreclosures but the city doesn’t when it comes to tax sales. It’s expensive to hand deliver notice so they typically just send letters. The problem is, there’s no real proof that the letters were ever received and the homeowner was properly notified. The law is very much on the side of the homeowners here, and there have been many cases when homeowners made successful arguments that they didn’t know about the sale.
Hence the right of redemption. This means that homeowners that lose their home for tax delinquency have 9 months after the sale to come up with all of the money (including any penalties, interest and attorney’s fees) and they get their house back. Even if you’ve bought it fair and square, you have no rights here. You have to give it up. You’ll get what you paid back plus 10%, but any other improvements and money in is lost. That’s why no title insurance company will insure a tax sale property until at least a year after the sale.
So when you buy a tax sale property, prepare to own it for at least a year. And hedge yourself to avoid losing it to the right of redemption.
- Use public data to understand a bit about the owner. Did they live in the property within the last few months before the sale (if they didn’t and you can prove it, they can’t claim it back). Knowing the debt situation of the owner, whether they’re local and they lived there and a bit about the possible circumstances will help you greatly reduce your risk. Even locating the owner and having them sign a quit claim deed is the best way to squash this problem.
- Be careful about how much you invest in the property in that first year. Just be aware of the risk and choose property wisely.