When homeowners are unable to pay their mortgages, lenders will usually foreclose on the property and sometimes opt to sell the property to recover a mortgage debt. Because lenders are usually not interested in owning and developing properties, they sometimes sell these homes at auction or deep discounts. It's important to note that foreclosure "deals" aren't always as good as they're made out to be -- banks and their shareholders aren't looking to lose money on these properties.
Basics of Foreclosure
Loans to homeowners to help them afford the cost of their home are usually secured against the property they are buying as collateral. This means that the bank has the right to repossess the home in a foreclosure in the event that the owner fails to repay the debt. Usually homeowners will work with their lender and local government resources to avoid a foreclosure. But if the homeowner has to abandon the mortgage, banks will often end up taking over the property and trying to sell it to recover their loan investment.
Bank-Owned Home Sales
Banks are usually eager to get rid of homes they end up owning with a foreclosure auction, as they represent non-performing assets for a bank and cost them in annual property tax obligations. Banks often cannot afford to do the maintenance and upkeep that a homeowner would, so the properties quickly depreciate as they fall into disrepair and neglect. This does not mean, however, that banks are looking to lose money on bank-owned homes. It’s often a careful balance between selling the property before taking on too many losses while demonstrating to their shareholders that they’re working to secure the best prices.
Listings of Bank-Owned Homes
Because sales of bank-owned homes can drive down the market and threaten the value of their loans in the neighboring community, banks usually avoid aggressively advertising bank-owned properties and their sale prices. Nonetheless, prospective buyers can usually get information about bank-owned homes from specialized websites, real estate agents and court documents. Some banks will post listings of the properties they’re trying to sell. For example, the Bank of America provides a searchable map of bank-owned properties.
Risks of Bank-Owned Home Sales
As with any investment, purchasing bank-owned homes – either as a primary residence or an investment property – comes with considerable risk. Bank-owned homes are often located in neighborhoods and communities hit with severe housing price declines, and it’s hard to know the long-term economic prospects for the area. In addition, homeowners who face foreclose might cease maintenance long before they stop paying their mortgages, so bank-owned properties might be in poor shape and are often sold “as-is” by banks.
- Department of Housing and Urban Development: Foreclosure FAQ
- Real Estate ABC: Buying Bank Owned Properties (REO); Walt Harvey; 2011
- Wall Street Journal; A Florida Court's 'Rocket Docket' Blasts Through Foreclosure Cases; Michael Corkery; February 2009
- Realty Store: Foreclosure Listings by State; 2011
- Bank of America: Search—Bank-Owned Properties; 2011
- Brand X Pictures/Brand X Pictures/Getty Images