As banks are foreclosing hundreds of thousands of properties across the country, the question keeps arising, “Can banks make profits on foreclosed properties?” The simple answer is yes, but it does take some special circumstances for it to happen. If the homeowner is aware of how to protect his equity, he may get paid even if he loses his home to the bank.
If the lender talks the homeowner into giving up his property in exchange for a deed in lieu of foreclosure, the bank can make a profit on the sale and not have the added cost of the foreclosure. It is generally accepted in the banking industry that a foreclosure costs an average of over $40,000. These costs include loss of interest, loss of additional lending power, increased Federal Reserve requirements, costs of the sale, maintenance of the property and commissions to a selling agent.
The key to whether the bank can make money is dependent on the property having equity. Probably 20% to 35% of the time when a foreclosure takes place, there is equity in the property and there are no second or junior liens in place. Many homeowners simply walk away from their homes believing they don’t have equity or can’t sell their home while it is in foreclosure.
If the bank takes the property to the foreclosure auction and extinguishes junior liens, they will be creating equity in a matter of minutes. However, if the property has junior liens, the lender will not accept a deed in lieu of foreclosure because the junior liens will stay attached to the property. So be careful, if a bank offers a homeowner a deed in lieu of foreclosure, there may be equity in the property.
Once the property goes to auction and is purchased by the bank, the property’s deed transfers to the bank after a redemption period. At this time the bank can sell the property for whatever price they can get. If a profit exists, the bank is entitled to it.
In summary, once the bank foreclosures on a property it is entitled to make a profit. Prior to their ownership, they cannot sell the property, only the deed holder (homeowner) can sell it. This happens in short sales all the time as the bank has to agree to the sale price but the homeowner must sign the deed transfer. In these cases, the bank takes a substantial discount on their mortgage to get the property sold and off their books. If the bank is out bid at the auction, which is anything close to their final judgment amount, they get their money owed but lose out on any additional profit.