Foreclosure auctions - Plaintiff bidding

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Foreclosure auctions - Plaintiff bidding

David Sabine
Cincinnati, OH · Member since 2016 · 12 posts · 0 votes

My question is, why do, at least from what I’ve seen here in Ohio, Hamilton County, do most of the foreclosure sales end up with the plaintiff purchasing at what is owed?

What am I missing? Please point out what I have wrong because it seems like I have to have SOMETHING WRONG! Here is the scenario as I understand/see it.

  1. Jane Seller has a house and puts on the market for $100k
  2. John investor get financed by his bank and purchases the house with 20% down and $80 mortgage.
  3. John Investor defaults on loan 5 years in and property is foreclosed.and balance of principal is ~ $70K
  4. Foreclosure AUCTION. Seller bids what is owed on the property???
    1. HOW DOES THIS MAKE SENSE???

Am I misunderstanding what the sheriff’s auctioneer stated? That for the most part, the plaintiff will win the bidding because they are going to bid up to what is owed. If that is the case, doesn’t the bank now have a liability of $140K for a property that originally sold for $100K???

Actual case:

Hamilton County Ohio:

Case: A1204637Plaintiff: Bank of America

Appraised at: $168K

Min bid: $112K

Plaintiff (WINNING) bid: $112K

What am I missing?

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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
10y

@David Sabine No.  If the bank is owed $70k, and they bid $70k at the auction, they don't "pay" anyone.  They would be paying themselves, since They are the ones owed the money, and bringing the action.  It's referred to as a "credit bid".  In these cases no one bid a satisfactory amount, so the bank"takes the property" for their credit bid amount, then sells it to get their money back.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    A bank has 2 choices when bidding at their foreclosure:

    1) bid up to what they are owed(including accrued interest, court costs, advances paid, etc).  This is all they are entitled to collect, any money above that balance goes to the owner, or subordinate liens.

    2) if they realize the property is not worth nearly what they are owed, they can bid up to a number lower than what they are owed, realizing they will never get the full amount owed.

    Sometimes, when these bank bid numbers are known/advertised, it will result in skewed bid results.....here bidding starts at $100, if the bank reveals they are bidding up to $180k (amount owed), on a property worth $100k, then no one bothers bidding, so the banks "buys it" for $100.

    Don't understand your reference to "doesn't the bank have a liability of $140k"?

    And don't just automatically assume "appraised values" are accurate.  The house could have burned down last month, been vandalized, etc. 

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  • David Sabine
    OP
    Cincinnati, OH · Member since 2016 · 12 posts · 0 votes
    10y

    you said you don't understand my reference to $140k and the bank liability.

    Here's what I mean: If I as the borrower default on my loan owing $70k and now the bank/plaintiff bids at the foreclosure auction $70k (what's owed) aren't they now out $140k? Three bank now has to now write a check for $70k + $100k they originally paid the seller - the $30k that was paid back to the bank prior to defaulting in the loan leaving $140k.

    What am I missing? Of the approximately 50 or so properties that were most recently sold, only about 5 weren't purchased by the plaintiff. The vast majority of the properties, that had anyone bid against the bank, were run up to CLOSE TO the "appraised" value (yes I know that isn't a reliable number) but this is where they ended.

    Thanks!

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    @David Sabine No.  If the bank is owed $70k, and they bid $70k at the auction, they don't "pay" anyone.  They would be paying themselves, since They are the ones owed the money, and bringing the action.  It's referred to as a "credit bid".  In these cases no one bid a satisfactory amount, so the bank"takes the property" for their credit bid amount, then sells it to get their money back.

    1Reply
  • Account Closed
    Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
    10y

    Several reasons:

    1. the bank does not want to reward the borrower by allowing him to get the property at a discount. ie the the bank bids 50k and the borrower bids 55k, then the borrower gets the property for less than the original balance owed.

    2. most loans have been sold so that they (the lender) have a contractual servicing agreement to bid the balance.

    3. many loans have pmi so that the lender gets paid in full. if they bid less, then pmi pays less.

    4. the many states have laws that require the lender to bid market, since market is hard to define in a foreclosure, they bid the balance to stay safe.

    5. left hand right hand. the legal team does not always get the asset management team on board until after the sale.

    6. many states have right to redeem the property, a lower bid means that they can redeem for less.

    7.you never know if someone will step up and pay.

    8. accounting rules for banks and potential losses are complicated but in general, a lower bid is usually not good for the bank where as a REO can be "fudged".

    9. accountability, banks are owned by shareholders, selling below market would be a breach of fiduciary duty to the shareholders. I know, you think that they lose more money but the issue is sticking to the process to avoid the appearance  

    10. as a former asset manager, we actually averaged 103% above the balanced owed on our REOs so do not assume that the value is going to be less than the loan, marketing time is critical.

    the list goes on.

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  • David Sabine
    OP
    Cincinnati, OH · Member since 2016 · 12 posts · 0 votes
    10y
    Originally posted by @Wayne Brooks:

    @David Sabine No.  If the bank is owed $70k, and they bid $70k at the auction, they don't "pay" anyone.  They would be paying themselves, since They are the ones owed the money, and bringing the action.  It's referred to as a "credit bid".  In these cases no one bid a satisfactory amount, so the bank"takes the property" for their credit bid amount, then sells it to get their money back.

     Thanks for the reply Wayne! That was what I was missing and that makes perfect sense.

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  • David Sabine
    OP
    Cincinnati, OH · Member since 2016 · 12 posts · 0 votes
    10y
    Originally posted by @Account Closed:

    Several reasons:

    1. the bank does not want to reward the borrower by allowing him to get the property at a discount. ie the the bank bids 50k and the borrower bids 55k, then the borrower gets the property for less than the original balance owed.

    2. most loans have been sold so that they (the lender) have a contractual servicing agreement to bid the balance.

    3. many loans have pmi so that the lender gets paid in full. if they bid less, then pmi pays less.

    4. the many states have laws that require the lender to bid market, since market is hard to define in a foreclosure, they bid the balance to stay safe.

    5. left hand right hand. the legal team does not always get the asset management team on board until after the sale.

    6. many states have right to redeem the property, a lower bid means that they can redeem for less.

    7.you never know if someone will step up and pay.

    8. accounting rules for banks and potential losses are complicated but in general, a lower bid is usually not good for the bank where as a REO can be "fudged".

    9. accountability, banks are owned by shareholders, selling below market would be a breach of fiduciary duty to the shareholders. I know, you think that they lose more money but the issue is sticking to the process to avoid the appearance  

    10. as a former asset manager, we actually averaged 103% above the balanced owed on our REOs so do not assume that the value is going to be less than the loan, marketing time is critical.

    the list goes on.

     Nicolas,

    Thanks for the in dept explanation. Your explanation makes clear why the bank does or has an obligation to bid. You answered questions that I didn't even know I had yet. Love BP! 

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  • William Howley
    Investor · Tampa, FL · Member since 2015 · 103 posts · 29 votes
    6y

    @David Sabine Hi, little late for a reply, I think I am understanding your question more so than how these others are replying. Its not about how the banks are bidding that much, it is WHY?

    We really dont know the answer, but basically the banks by bidding up to what they can, they know they are going to outbid the investors. They are basically saying they want to hold onto the property. They may have done a calculation that shows that it would be worth it for them to hold onto the asset, growing economy, or cash amount is too low. Or they think they can get more by posting it some where else. I have been tracking auctions for some time now, and recently I haveseen a lot of banks bid the most they can, taking back the property, then to see the exact same property on a different list source like Hubzu.com, Auctions.com, or even the traditional MLS as an REO. The bank is mandated to offer the property at foreclosure auction, but they are not required to sell it! if they they think they can get more money on the MLS they will hold onto it and sell it in another means.

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