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. Foreclosure proceedings can't begin for the first 120 days after you miss a payment, but 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.
TL;DR (Too Long; Didn't Read)
If a foreclosed house does not sell, the bank owning the house will still continue to try to sell it through auctions or real estate listing sites.
Selling Through a Foreclosure Auction
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.
Marketing REO Homes Online
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."
Other Selling Strategies
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.
Holding of REO Properties
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.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.