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What Do Banks Do With Unsold Foreclosures?

by Todd Peterson, studioD

Foreclosure, the process in which a bank reclaims a property from an owner who has defaulted on his mortgage, is not uncommon. Often, the lender works out a short-sale agreement and takes a loss on the transaction. When the bank is either unwilling or unable to complete a short sale, it forecloses on -- and becomes the owner of -- the property. For homebuyers in the know, bank-owned properties may result in significant bargains.

Steps to Foreclosure

There are several actions that must happen before a property is foreclosed upon. First, the borrower defaults on his loan; this usually happens after three successive payments have been missed. Then, the bank sends the borrower a notice of default. If the borrower doesn’t pay the past-due amount, the bank forecloses on the property and then takes it to auction.

Sell It at Auction

At the auction, the lender makes its first attempt to sell the property. In most states, the bidding process is open to the public and anyone can attend and bid on a foreclosed home. In some states, even the borrower can attend the auction and make restitution on the amount owed to reinstate the mortgage. For the general public, however, bidding on property at foreclosure auctions requires specialized knowledge and usually a large amount of liquid funds.

Back to the Bank

If the lender isn’t able to sell the property at the auction, it becomes the owner of the property. This type of property is known as bank-owned or real-estate owned, commonly referred to as REO. Many banks have asset managers dedicated to managing REO properties. Most lenders, however, don’t want to hold onto property because REOs count as debts on a financial institution’s balance sheet. And, as the owner of these properties, the lenders are responsible for their maintenance and upkeep.

Get It Listed

Since lenders want to sell their REO inventories, they often work with real estate brokers who list these properties for them. In some regions of the country, there are brokerages that specialize in REO properties. Additionally, many larger lending institutions list their available REOs on their websites. The properties often require some repairs, and they can be good deals for homebuyers with the financial resources and skills to fix them up.

About the Author

Todd Peterson, based in Las Vegas, has been an editor and writer for the past 15 years, covering topics ranging from books to business to vacationing. He is also an entrepreneur and real estate professional who runs a travel website. He is currently working on a series of e-books on personal development for real estate investors and entrepreneurs.

Photo Credits

  • John Moore/Getty Images News/Getty Images