Foreclosure with equity left in home.

[Dereck Watson]

Hello everyone! I recently came across a list of leads being offered by a realtor of short sale opportunities where the sellers were being foreclosed on while having tens of thousands of dollars in equity with the home. I believe I understand how to leverage these opportunities and convince them they are better off going through with a short sale than letting the bank take the property back, but I have a few questions I was hoping someone could help clarify for me. 

What exactly happens to the equity in the home? Is it forfeited by the owner? Do they receive the difference in sale price once the foreclosure auction/REO sale goes through?

What are the likely fee amounts that will be charged by the bank for the foreclosure process that will begin to eat up the equity in the home if it is not forfeited completely?

How likely is a bank to attempt to sell the property for anything more than what is owed on the mortgage?

Thank You in advanced to anyone who can help!  I feel there is a great opportunity for us here with these leads and just want to make sure I am completely clear on how to position the negotiations. 

[Jon Holdman]

The details of the foreclosure process vary from state to state.  In most cases, the foreclosing lender sets an opening bid.  Its a combination of what they're owed, plus late fees and legal fees.  So, in @Lauren B.'s example of a house worth $100K with a $60K outstanding balance, the total owed is probably closer to $75K with all the fees and foreclosure costs.  If its truly worth $100K as is there would likely be other bidders.  Some one would win the auction and get possession.  A bank would not typically bid, other than the opening bid.  But if the loan is owned by someone else, especially an investor, they might well bid with the intention of getting possession.  If the house does sell for more than the lender's opening bid then any excess goes to the former owner, after all fees.  

In the example, the owner would be stupid not to just sell and avoid foreclosure.  Even after a discount they will pocket more money than letting to go to auction.  There is considerable risk for buying at auction so even a winning bidder is going to bid significantly less than they might may in a normal sale.

If nobody bids then the foreclosing lender "wins" and gets possession of the house.  The former owner gets nothing.  In states that allow judgments, the bank may set their opening bid lower than the total owed and then file a judgment against the owner for the shortage. 

Regardless of who ends up with the property, its theirs to do with as they wish. If the bank does take it and it becomes a REO, they will almost always (eventually) list it on the MLS and sell it. They can ask whatever price they want, even if that nets them a profit from what they were owed. The bank or whoever wins the auction will absolutely sell it for as much as they can. The former owner is out of the picture once it sells at auction and does not get any of the proceeds from a post-auction sale.

Notwithstanding "redemption rights".  In some states, the former owner or a junior lienholder (who gets wiped out by the foreclosure) can "redeem" and pay the winner off and take possession.