I’m actually curious about a specific situation within that, when a LOT more is owed on a property than it’s worth. Let’s say there is a property that is reasonably worth $100k but there is over $200k owed on it to the bank via non-payment, interest, whatever. What does the bank do then? There, in theory, will NEVER be a buyer for that property at that price. What becomes of it then?
In: Economics
The bank sells at a loss and writes the loss off against other profits.They hope to sell a repossessed property for more than they are owed, but it doesn’t always happen.
The bank doesn’t want to own real estate; they want cash.
If the property is worth far less than the remainder of its mortgage, then the bank loses money. There’s no clever trick here. ;p The bank auctions off the property, gets as much money for it as they can, and…that’s it.
This is why the banks assess risk before giving out a loan, and give higher interest rates to riskier loans (because with a higher risk of the property getting foreclosed on, they want to get more money back more quickly).
I believe you that you have seen this happen.
My guess would be the bank was required to auction but did not want to lose the property. Especially if this was recent. Prop values were going up so quickly they must have thought holding on for another 6 months would pay off.
So they attend the auction and bid double the value. They “win” but are essentially buying it from themselves. They pay the auctioneer a fee and see what happens on a few months.
Here is the answer from another redditor:
> If a bank buys back a house they are in effect setting a minimum bid. They do this as the auction process is required by foreclosure laws which also limit the ways they can deal with the disposition of the house since the defaulting owner still has rights. After they’ve “bought” the house the defaulting owner no longer has any interest in the house and the bank has more flexibility in what they sell the house for or how they sell it.
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