Banks and mortgage companies approve loans for borrowers to purchase homes and property. In general, approval is based on the borrower’s credit rating, income, and the value of the property being purchased. The bank requires the borrowers to sign a security document, called a mortgage or deed of trust, which will ensure that the bank can sell the property for a profit, if the borrowers default on the loan payments.
If the borrowers default on the loan, the lender can initiate the foreclosure process. Depending on the laws of the state where the property is located, the process is either done judicially or non-judicially. In judicial foreclosure, the lender must file a lawsuit against the borrowers, requesting the amount owed on the mortgage loan. If the borrowers cannot pay the lender, the court can issue a ruling in favour of the lender. This will allow the lender to sell the property through an auction. In non-judicial foreclosure, the lender can bypass this step and try to sell the property without a court ruling.
Foreclosure auctions are held as a last resort, for the lender to recoup the loan amount to which the borrower defaulted. The sale generally occurs at the county courthouse, under the supervision of the county sheriff or the trustee for the lender. Starting bids usually consist of the unpaid loan balance, plus interest, penalties, and legal fees acquired by the lender during the foreclosure process. Practically anyone is eligible to bid on a property at a foreclosure auction, if they are capable of paying for it in cash.
If a property does not receive any bids at the foreclosure auction, the bank must assume responsibility and ownership of the property. The property then becomes known as bank owned, or real estate owned (REO). Property ownership involves routine maintenance and paying property taxes, among other things. It is not in the bank’s best financial interest to keep a property on its books. Because of this, the bank is usually willing to sell properties it owns, to qualified borrowers at discounted rates.
Both bank owned and foreclosure properties earned their status because their previous owners did not satisfy the mortgage loan’s payment terms. Buyers looking to purchase either one of these properties should take on substantial investigation, including a property inspection. Foreclosure sales may result in great deals, but generally the buyer should have the full cash payment. Also, in a foreclosure sale, interested buyers compete in a bidding war. With a bank owned property, the bank may be willing to negotiate the price. Some banks may even offer loans for these properties.
These may be the ideal way to save money on property purchase, provided the buyer can come up with the full cash amount.