What it means
The CFPB says foreclosure is done in two main ways, depending on the state. In judicial foreclosure the lender files a lawsuit and the borrower can raise defences in court.
In non-judicial foreclosure the lender follows a series of notices under a power of sale clause, with no court case. A sheriff's sale belongs to the first route.
After the lender wins a judgment, the court directs the sheriff's office to auction the property. Investopedia says these auctions often take place on courthouse steps, are announced publicly, and sell the property to the highest bidder, often as is.
The lender itself can bid, and the CFPB notes the lender gets the property if it is the highest bidder. The lender cannot rush into it.
The CFPB says the legal foreclosure process generally cannot start until the borrower is at least 120 days behind on payments. After that, the time until a sale depends on the state.
Proceeds follow a priority order set by law. Costs of the sale come first, then liens in order of priority, and any surplus may go to the former owner, depending on state rules.
If the price does not cover the debt, the lender may seek the shortfall in some states. Redemption rights vary.
Investopedia says in many places the owner may regain the property after the sale by paying the lien and costs in full. Other countries run forced sales differently, so local law decides.
A sheriff's sale differs from a tax sale. A tax sale is run by a local authority to collect unpaid property taxes, and many properties are sold at once.
In practice
Real-world examples.
Example
A fictional home sells at a sheriff's sale for 210,000. The first mortgage is 180,000, sale costs are 8,000 and a second lien is 15,000, which leaves 7,000 for a junior judgment of 20,000, so the judgment holder is short by 13,000. The former owner receives nothing.
Example
A fictional home sells for 250,000 against the same debts. After 180,000, 8,000 and 15,000, 47,000 is left. The junior judgment takes 20,000, leaving a surplus of 27,000 that may go to the former owner, subject to state law.
Example
A fictional investor buys a house at a sheriff's sale for 190,000 in as-is condition, then spends 25,000 on repairs and 5,000 on costs. The house later sells for 260,000, so her gain is 260,000 - 190,000 - 25,000 - 5,000 = 40,000. The gain depends on the condition, which she could not inspect fully.
Formula
Calculation
Surplus or shortfall = Sale price - Sale costs - Liens in priority order.
Worked example for a fictional home sold at a sheriff's sale for $250,000, with sale costs of $8,000, a first mortgage of $180,000, a second lien of $15,000 and a junior judgment of $20,000: 250,000 - 8,000 - 180,000 - 15,000 - 20,000 = $27,000 surplus, which may go to the former owner subject to state law.
If the same home sold for only $210,000, the sum would be 210,000 - 8,000 - 180,000 - 15,000 = $7,000 left for the $20,000 junior judgment, so that creditor is short by $13,000 and the former owner receives nothing.
Investor gain = Resale price - Purchase price - Repairs - Costs. With $260,000 - $190,000 - $25,000 - $5,000 = $40,000.Case study
Seen in the real world.
This case study is fictional and illustrative. Elena, 52, in Ohio, has missed mortgage payments for five months after a job loss. A court order sets a sheriff's sale. She calls a housing counselor and her servicer before the date.
The counselor explains that Elena can still ask the lender about a loan modification or sale, and that she may have redemption rights under her state's law. She also learns that a sale price above her debts could leave a surplus. Elena sells the house herself before the auction at $235,000 with her lender's agreement. Her loan payoff is $185,000 and sale costs are $10,000, so she keeps $40,000.
An auction might not have brought that price. The lesson is that acting before the sale gives more choices than waiting for it. Had she waited, the picture would have been very different. A bidder at the courthouse steps would have faced an as-is property with unknown condition and possible liens, and would probably have bid well below $235,000, leaving less surplus for Elena and less certainty for everyone involved.
Watch out
Common mistakes.
- Bidding without checking liens, title and condition, since properties are often sold as is.
- Assuming a sheriff's sale ends the owner's rights everywhere when redemption rights vary by state.
- Waiting for the auction date instead of contacting the servicer and a counselor earlier.
Questions
People also ask.
What is a sheriff's sale?
It is a court-ordered public auction of a property to pay a debt, usually after a judicial foreclosure.
Who gets the money?
The sale costs and liens are paid in priority order. Any surplus may go to the former owner depending on state law.
Can the owner get the property back?
In some places the owner may redeem it by paying the lien and costs, but the law varies by location.
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