Foreclosure with equity left in home.

5 Replies

Hello everyone! I recently came across a list of leads being offered by a realtor of short sale opportunities where the sellers were being foreclosed on while having tens of thousands of dollars in equity with the home. I believe I understand how to leverage these opportunities and convince them they are better off going through with a short sale than letting the bank take the property back, but I have a few questions I was hoping someone could help clarify for me. 

What exactly happens to the equity in the home? Is it forfeited by the owner? Do they receive the difference in sale price once the foreclosure auction/REO sale goes through?

What are the likely fee amounts that will be charged by the bank for the foreclosure process that will begin to eat up the equity in the home if it is not forfeited completely?


How likely is a bank to attempt to sell the property for anything more than what is owed on the mortgage?

Thank You in advanced to anyone who can help!  I feel there is a great opportunity for us here with these leads and just want to make sure I am completely clear on how to position the negotiations. 

I’m confused - hopefully someone more experienced can weigh in -

Why would a bank take less than is owed on the mortgage if the property is worth 10’s of thousands more?

Ie, a house is worth $100,000. Seller owes $60k and you want to offer the bank 40-50k... why would they do a short sale?

If there are thousands in equity, just bring the note current and buy it subject to the mortgage.

something smells fishy.
Did you pay for this secret list?

The details of the foreclosure process vary from state to state.  In most cases, the foreclosing lender sets an opening bid.  Its a combination of what they're owed, plus late fees and legal fees.  So, in @Lauren B. 's example of a house worth $100K with a $60K outstanding balance, the total owed is probably closer to $75K with all the fees and foreclosure costs.  If its truly worth $100K as is there would likely be other bidders.  Some one would win the auction and get possession.  A bank would not typically bid, other than the opening bid.  But if the loan is owned by someone else, especially an investor, they might well bid with the intention of getting possession.  If the house does sell for more than the lender's opening bid then any excess goes to the former owner, after all fees.  

In the example, the owner would be stupid not to just sell and avoid foreclosure.  Even after a discount they will pocket more money than letting to go to auction.  There is considerable risk for buying at auction so even a winning bidder is going to bid significantly less than they might may in a normal sale.

If nobody bids then the foreclosing lender "wins" and gets possession of the house.  The former owner gets nothing.  In states that allow judgments, the bank may set their opening bid lower than the total owed and then file a judgment against the owner for the shortage. 

Regardless of who ends up with the property, its theirs to do with as they wish. If the bank does take it and it becomes a REO, they will almost always (eventually) list it on the MLS and sell it. They can ask whatever price they want, even if that nets them a profit from what they were owed. The bank or whoever wins the auction will absolutely sell it for as much as they can. The former owner is out of the picture once it sells at auction and does not get any of the proceeds from a post-auction sale.

Notwithstanding "redemption rights".  In some states, the former owner or a junior lienholder (who gets wiped out by the foreclosure) can "redeem" and pay the winner off and take possession.

@Dereck Watson
What you state does not make sense. A property with equity would not be sold as a short sale.

It may be foreclosed upon and whatever monies are left over after paying the liens go to the homeowner

More than likely the property has a second mortgage and the first or 2nd may be foreclosing so their is equity in the first but not full equity in the 2nd

In that case a lot of times there may be a short sale.

Sorry, in my multi tasking I used the term short sale where it makes no sense. You are all correct it would not be a short sale. I did not pay for this list it is just a local realtor who wants to be able to list the properties once they are rehabbed. 

@Jon Holdman thank you for ignoring my short sale comment and clearing up all the questions I had! that was the exact response I was hoping for and i appreciate it greatly! 

Originally posted by @Jon Holdman :

The details of the foreclosure process vary from state to state.  In most cases, the foreclosing lender sets an opening bid.  Its a combination of what they're owed, plus late fees and legal fees.  So, in @Lauren B. 's example of a house worth $100K with a $60K outstanding balance, the total owed is probably closer to $75K with all the fees and foreclosure costs.  If its truly worth $100K as is there would likely be other bidders.  Some one would win the auction and get possession.  A bank would not typically bid, other than the opening bid.  But if the loan is owned by someone else, especially an investor, they might well bid with the intention of getting possession.  If the house does sell for more than the lender's opening bid then any excess goes to the former owner, after all fees.  

In the example, the owner would be stupid not to just sell and avoid foreclosure.  Even after a discount they will pocket more money than letting to go to auction.  There is considerable risk for buying at auction so even a winning bidder is going to bid significantly less than they might may in a normal sale.

If nobody bids then the foreclosing lender "wins" and gets possession of the house.  The former owner gets nothing.  In states that allow judgments, the bank may set their opening bid lower than the total owed and then file a judgment against the owner for the shortage. 

Regardless of who ends up with the property, its theirs to do with as they wish. If the bank does take it and it becomes a REO, they will almost always (eventually) list it on the MLS and sell it. They can ask whatever price they want, even if that nets them a profit from what they were owed. The bank or whoever wins the auction will absolutely sell it for as much as they can. The former owner is out of the picture once it sells at auction and does not get any of the proceeds from a post-auction sale.

Notwithstanding "redemption rights".  In some states, the former owner or a junior lienholder (who gets wiped out by the foreclosure) can "redeem" and pay the winner off and take possession.

 Well stated Jon. I would add that the strategy of bidding lower than total debt has been successfully challenged in many districts if the servicer goes after the borrower for a deficiency later. I've seen where they have had to modify their deficiency to start at total debt and then net against the sales price before they can establish their amount instead of the lower opening (if final) bid amount. Granted, if no one says anything or no one challenges the deficiency, they lose but, worth clarifying nonetheless.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.