Bank’s REO Property not Part of Foreclosure Sale Profits
Question: After we refinanced our Mesa home three years ago my husband was badly injured in a car accident on the Loop 202 and lost his job. We could no longer afford the mortgage payments and lost our home to foreclosure by the bank. The bank’s representative says that our home is now their Real Estate Owned (“REO”) property. In our neighborhood the home prices are finally appreciating, and when the bank sells our home the bank should be able to make a profit. Are we entitled to any of this profit?
Answer: By way of background, a foreclosure sale is generally a public auction by the bank on the “courthouse steps,” or at the office of a title company. In the last few years there have been more investors purchasing homes at foreclosure sales. If an investor purchases a home at the foreclosure sale, and the purchase price is in excess of the bank’s mortgage loan and foreclosure costs, and there are no other liens on the home, there are excess proceeds. The homeowner should be entitled to those excess proceeds.
However, by stating the property is REO property, your bank’s representative indicates that the property has already been foreclosed and is now bank owned. Sometimes the only “buyer” at the foreclosure sale of your home is the bank itself. The purchase price offered by the bank and accepted by the bank is simply a “credit bid” in the amount of the balance of the unpaid mortgage loan, interest owed, attorney’s fees, and costs generated by the foreclosure process. The “credit bid” allows the bank to essentially break even.
The “credit bid” and sale of the property by the bank to itself therefore ends the foreclosure process. The bank then has a deed to the home, and the home is REO property on the balance sheet of the bank. If the bank thereafter sells the home to a buyer, the bank is entitled to all of the sale proceeds, just like any other seller of a home. Therefore, in your situation the bank will be entitled to all of the sale proceeds, including any “profit” from the sale of your home after foreclosure.
Note: Sales of bank-owned homes are generally 10%-15% below market value. The reason is that banks are not in the business of owning homes, are interested in more liquid assets, and just want to “dump” the homes in order to remove the property from the bank’s balance sheet as quickly as possible.