No homeowner applies for a mortgage believing that he will one day lose his house to foreclosure. If you stop making your mortgage payments, however, that is precisely what will happen. According to the U.S. Department of Housing and Urban Development, your mortgage is officially in default when a payment is late by 30 days. If you have not caught up on your payments within three to six months, your mortgage company will claim ownership of the property and foreclose on your home. After foreclosure, the bank's goal is to recoup its losses by selling the home to another individual.
A home's first stop after foreclosure is the foreclosure auction, which often takes place at the courthouse in the county where the home is located. Banks announce upcoming auctions online and in local newspapers to attract buyers. At the auction, the bank makes the opening bid to establish the minimum price it is willing to accept for the home. The minimum bid amount is generally equal to the amount the former owner owed on the mortgage. If no one else places a higher bid, the bank retains ownership of the property and the house becomes a "real estate owned" or "REO" home.
Banks market REO homes in much the same way that individual sellers market property. The bank works with a real estate agency that lists the home in the area's multiple listings service, commonly known as the "MLS." Some banks also maintain information about currently available REO homes on their websites.
An excellent marketing strategy and plenty of exposure may increase the odds that the right buyer will find the house, but a sale is never certain. A prospective buyer may disregard an REO home for a variety of reasons, such as damage done by the former owner before leaving, or marketing of the home "as is."
Banks' policies differ, but if an REO home sits on the market for long enough without attracting much attention, the bank may employ any number of strategies -- such as hiring a third-party to clean up the property or lowering the home's asking price -- to make the home more attractive to buyers.
Sometimes the house, its price and its condition aren't the problem. Sometimes the problem is the market itself. Poor economic climates result in more foreclosures and, ultimately, more REO homes. If the market is flooded with foreclosures, buyers looking for a home below market value have more options. Any given REO property could languish on the market indefinitely.
A home that doesn't sell remains in the bank's possession until it does. The general opinion surrounding REO homes is that banks want to sell them quickly to get them off the books. This, however, is not always the case. Banks frequently hold their REO properties that do not sell at auction rather than putting them on the market.
The reasoning behind this is twofold. For starters, banks risk saturating the market with homes if they release all of their inventory at once. Doing so would drive down prices and result in additional losses for the bank. Second, until a home is sold, the bank can count its full-market value on its books. If an REO home sells for less than fair market value -- and many do -- the bank must update its books to reflect the loss. The reason a home does not sell after foreclosure may not be that the property is undesirable, but that the home is unavailable for purchase.
- U.S. Department of Housing and Urban Development: Foreclosure Process
- RealtyTrac: How to Buy a Home at Auction
- Walaw Realty: REO or Bank Owned Homes Explained: Buying an REO Property Presents an Opportunity and a Challenge
- Bank of America: Real Estate Owned – Search for a Property Listing
- Bankaholic: Disadvantages of Buying Foreclosed Homes
- AOL Real Estate: 'Shadow REO': As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest
- Comstock/Comstock/Getty Images