What Happens on New Property After a Foreclosure?

There are rare cases when a builder will be foreclosed upon due to lack of or inability to pay the bank on lot or temporary loans used to buy land and develop properties, or when newly built properties just don't sell. Typically, the bank or lender will foreclose on the property and it is handled the same as a foreclosure on a homeowner's property. It will be auctioned on the courthouse steps as an entity-to-purchaser transaction, the entity being the lender who loaned money on the builder's project.

Why New Property Foreclosures Happen

Builders with high debt sometimes find themselves unable to sell newly built properties. Big drops in market demand along with the lowering of property values can cause these types of loans to go into default. Homebuilders who are unable to obtain financing to complete projects state that they cannot sell the models or new homes on unimproved lots. This can lead to a serious depletion in funds that may cause a bank to foreclose on properties before they are ever sold.

The Process for Foreclosure and Sale

The process that affects homebuilders in the foreclosure process does not include just an inability to sell the homes, but also mechanics and labor liens on property that can be filed by vendors and suppliers who worked on and supplied the materials to build the homes. Laborers and suppliers get a first-priority mechanics or materialman's lien on any property that is listed for sale when it goes to auction. The reason for this is because they cannot retrieve materials and goods that have already been used to build and finish a complete or partially completed home or commercial building. There may also be the added expense of incurring a property tax lien, which takes priority ahead of mechanics liens, if the property taxes have come due and the builder cannot pay them. There are no laws stating that an owner is not free to bid at the auction if they somehow obtain the money to pay off the loan in full and are the highest bidder at the sale.

Who Can Purchase These Types of Foreclosures

Basically, anyone with the cash funds (in the form of a certified cashier's check) can purchase a bank foreclosed property. Purchases can be made by individuals or groups that have formed investment and/or property management companies. The sale usually begins with a bid amount that includes the loan balance, accrued interest, attorney's fees and any associated costs. It is up to the purchaser to make certain they get clear title to the property from the bank, and this will usually only occur if and when any material and tax liens are paid. The properties are typically sold "as is," meaning the bank will make little to no repairs or maintenance to the property once it is sold.

Effect on Banker's Portfolio

Once the bank owns the property, there is no longer a mortgage loan and it goes into their inventory. The property, or a group of properties, goes into the bank's portfolio of real estate owned (REO) and can be offered for sale individually or as a package deal to any investor up to the task of purchasing it. The bank handles evictions, repairs and cleanups on the property, which also affect their costs. Unless the properties are of very high value, these details usually lead to an overall loss for the lender who is trying to recover some of their investment.

Managing New Property Foreclosures That Don't Sell

REO asset managers are charged with handling the bank's portfolio of properties until they sell. Banks are more interested in getting the best offer than just "ditching" properties that are distressed in order to get them off the books. They want to recover as much as they can as quickly as they can. This usually calls for people who can price these homes, find an agent to market them and get them sold to a secondary market (a servicer) or to an investor by a foreclosure, a short sale (see Resources) or an REO sale direct from the bank without foreclosing.