What Does It Mean When a Mortgage Company Buys a Home in a Sheriff’s Real Estate Sale?

The foreclosure crisis that swept the nation during the late 2000s has inflicted lasting damage on the American economy. Even as hundreds of thousands of homes remain in foreclosure, millions more are awaiting processing by local housing authorities. What's more, far too many homeowners are teetering on the brink of insolvency. Some folks are just a single missed mortgage payment away from losing their homes to the foreclosure process.

In most jurisdictions, foreclosed properties are processed and "disposed of" by a "sheriff's sale." The process is relatively straightforward: It involves advertising and then executing an auction for each foreclosed property. These auctions are open to to the public and are typically attended by a hodgepodge of discount-seeking families, small-time landlords and major property management companies. In addition, representatives from the bank or investment firm that issued the original mortgage on the home that's being auctioned are almost always in attendance.

These representatives supervise the auction process to ensure that their employer receives an adequate return on its investment. Since the proceeds from each foreclosure auction devolve to the original mortgage lender, these representatives have a vested interest in ensuring that these returns are adequate. In relatively healthy housing markets, these representatives have little reason for concern: Most foreclosed properties in such areas are seen as attractive bargains and tend to be snapped up at substantial premiums to their original asking prices.

In distressed housing markets, the calculus can be different. Areas in which foreclosure rates are unusually high tend to suffer from depressed housing prices and gluts of sub-par homes. In some places, there aren't enough interested buyers available to purchase all of the properties that come up at auction. Many run-down or unattractive homes simply don't receive any bids at auction. Others receive rock-bottom bids that mortgage-lender representatives aren't cleared to accept. In both cases, these representatives must step in and purchase the distressed home for their employers.

When a mortgage-lender representative purchases a distressed property at auction, his or her employer assumes responsibility for the house. In most cases, the lender will quickly arrange for a licensed real estate agent to appraise and list the property. Since this involves listing fees as well as expenses related to repair and renovation work, this is not a desirable outcome for the lender. Although the house's final selling price will probably be substantially higher than its auction value, it's likely that the lender will still need to sell it at a loss.

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