Here’s how home foreclosure sales really work

Published 12:01 am Sunday, December 6, 2009

Question: Thank you for your Nov. 29th article, “Advice if you’re trying to swoop in on a foreclosure deal.” It was very interesting and shed some light on what’s going on in the real estate market. However, I still don’t understand something. You stated, “At the foreclosure auction, the lender holding the first mortgage makes an opening bid equal to the total amount it is owed.” This is exactly what I’ve heard over and over. But what if the market value is below this amount and no one else bids? So many houses were purchased with close to 100 percent mortgages that this scenario must happen a lot. What would a bank gain by bidding an amount higher than the actual market value? Is this just a formality to take over the title? When (and how) does the house get resold at a real market price?

Answer: I understand your confusion. You are correct when you say that many homes are worth less now than the first mortgage balance owed on the property, not to mention any second mortgages on the home.

That’s why I said in my previous column that finding a real bargain in the foreclosure market is not as easy as some of the get-rich-quick guys would have you believe.

Here’s how the process works:

When a homeowner stops making the mortgage payments, within a couple of months the lender sends a notice of default to the borrower. If the payments are not brought up to date within 30 days, the lender records a notice of trustee sale. It is called a trustee sale because in this state we do not really finance property with a mortgage, we use a legal document called a deed of trust. The advantage of the deed of trust is that the lender does not have to go to court to foreclose as it would with a mortgage.

Under the deed of trust, a third party called a trustee is appointed to handle the sale of the property. The trustee is responsible for advertising the sale, delivering all the required notices and literally selling the property at auction on the courthouse steps.

After the sale notice is recorded, the borrower has up to 11 days before the trustee sale to bring the payments up to date and cover all of the accumulated legal fees and other costs incurred by the trustee. This is called the reinstatement period. In most cases, that is exactly what happens. The homeowner is able to prevent the trustee sale by coming up with the money somehow or selling the property before it goes to auction.

When a home is sold for less than the mortgage balance, that is called a short sale. To complete one, the bank must agree to accept less money at closing than the full balance. This happens quite often because the bank is likely to net more money from a short sale than it would if they took title to the house at a foreclosure auction and re-sold it. The problem is that due to the huge backlog of short-sale requests, it can take several months for a bank to make a decision.

If the homeowners cannot complete a short sale before the foreclosure auction, the lender automatically bids the amount owed at the auction. This is just a formality, the lender doesn’t actually put up any money. It gets credit for the amount owed by the former owners.

If somebody else offers more than what’s owed, the bidder gets the property and the lender is paid off in full. But in many cases, there are no bidders at the auction because the house is underwater and there is no equity left. In that case, the home becomes a bank-owned property. Banks fix up the houses, if necessary, and then market them through real estate agents just like any other home seller.

Sometimes you can get a “steal of a deal,” but bank-owned homes typically sell for about the same price as similar homes in the neighborhood, depending on the desirability and location of the particular home. Don’t expect banks to “give away” the homes they are selling. They are trying to recover as much of their lost loan revenue as possible so they try to get the highest sales price possible — just like any other home seller.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.