The Carrying Costs for a Foreclosed House

When a bank forecloses on property, it runs the risk of becoming the new owner at the foreclosure sale with the responsibility of paying all homeownership costs. These costs include property taxes, insurance, preservation and marketing costs, and personnel expenses. The Federal Housing Administration estimates a foreclosed property will be held approximately 90 days before resale; however, if the property requires extensive repairs or the bank is unable to quickly sell it, the carrying costs can become quite significant.

It is standard practice for a borrower to make payments into an escrow account to pay their property taxes, in conjunction with their regular monthly mortgage payments. If a borrower defaults on their mortgage loan, it is highly likely that a shortage of escrow funds to pay the property taxes will exist as well. The responsibility for payment of property taxes lies with the owner; therefore, if the bank acquires title to the property at foreclosure, it is responsible for any delinquent property taxes, as well as any property taxes that accrue while carrying the property.

If the bank becomes the property owner at the foreclosure sale, it must immediately obtain hazard and/or flood insurance for the property. Since the previous owners will generally have vacated the property by the time ownership changes hands, it becomes an increased target for vandalism. Sufficient insurance coverage is essential to protect the bank’s investment.

Many foreclosed homes are left in poor condition; therefore, the bank as the new owner must repair the damage and clean up what the previous owners left behind. The property must also be secured and protected until such time as the bank is able to sell it, which includes changing the locks, removing any debris, winterizing the house, and boarding the windows, if necessary.

A bank is typically not in the business of marketing and selling real estate; therefore, it is common for a bank to hire a realtor to sell bank-owned properties acquired through foreclosure. The bank may still choose to create brochures, or website and newspaper ads detailing the property it has for sale; however, if a realtor participates in the sale of a property, the bank will pay commission costs for the realtor's services.

Managing foreclosed properties requires personnel who are familiar with the Federal Government’s rules and regulations regarding bank-owned property. These rules and regulations cover specific accounting practices, compliance with the Housing & Urban Development (HUD) property and preservation guidelines, appraisal requirements, and foreclosure registration requirements. Sufficient personnel are necessary to ensure compliance with these rules and regulations, manage tax and insurance payments, and any third-party contracts related to preservation expenses and marketing costs.