Types of Bank Foreclosures

by Roxanna Guinan, Contributor

There are several classifications of foreclosure properties ― including pre-foreclosures, bank-repossessed/real-estate-owned properties, and government-owned properties ― and it is helpful to understand the nuances of each type.

Pre-Foreclosure Properties

It usually takes about 6 months for a bank to complete the legal and administrative steps necessary to finalize a bank foreclosure. During the pre-foreclosure period, the borrower/homeowner may be able to negotiate a deal to avoid the potentially negative results of a bank foreclosure (which includes a tarnished credit report and the loss of equity in property).

Buying a pre-foreclosure property can be beneficial to both the bank and the buyer because it eliminates the often lengthy foreclosure process.  Since the bank avoids having to maintain and later sell the property, they may allow a new borrower to take over the current mortgage payments. Banks also tend to be more willing to negotiate favorable loan terms and rates for pre-foreclosure properties.

It is important to note that the buyer must obtain permission from the seller if they are interested in a pre-foreclosure sale. This is because banks (and other mortgage lenders) are not allowed to disclose financial information about homeowners to potential buyers.

Bank Repossessed or Real Estate Owned (REO) Foreclosure Properties

Perhaps the saddest part of a foreclosure occurs when the bank notifies a homeowner that it intends to seize the property and begin eviction proceedings. After all the legal documents are filed, the bank foreclosure process is completed and the homeowner (or tenant) is evicted. The home is then referred to as “bank repossessed” or “Real Estate Owned” property.

Before a house becomes REO property, it must be put up for sale at a foreclosure auction. Bank foreclosure auctions are typically conducted by a local sheriff or other  designated official.  These days, however, there are few (if any) bids on properties at auctions ― so the home typically reverts back to the bank and is classified as an REO property.

A Real Estate Owned property may be in need of repair, since the last homeowner probably stopped spending money on general maintenance ― the landscaping may be overgrown and the property’s interior could be damaged, or even trashed.  Banks generally want to sell these types of foreclosure properties as soon as possible, in order to reduce their inventory of non-performing assets and to stop paying for property maintenance. Because of that, banks are usually willing to accept below-market offers from new homebuyers with good credit.

Government-Owned Foreclosure Properties

Government foreclosed properties present another opportunity for homebuyers to purchase homes at distressed prices.  These properties are typically made available by various government or law enforcement agencies for a variety of reasons, including the following:

  • Non-payment of small business association or other government agency loans
  • Failure to pay taxes to the county, state, or IRS
  • Government surplus properties
  • Seizure in criminal or customs-related cases
  • Unclaimed property escheated to the state