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Originally Posted by kimmom2five
All I know is that on the MRIS listing the realtor sent it says Foreclosure?-Yes and both realtor refer to it as a foreclosure. And I don't believe it was offered at auction before it was listed. Maybe just a different process for a different state.
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The nomenclature may seem like splitting hairs to you, and realtors around here will also call a REO a foreclosure, but after a bank takes possession of a foreclosed property the opportunity to assume risk to offset part of the purchase price has passed. I suspect that realtors Bank REOs foreclosures because customers come to them asking for foreclosures. They are not going to miss the opportunity to present product to those customers, so they go ahead and call REOs foreclosures. Also, believe it or not, many realtors don't understand how the foreclosure process works.
Virginia is a trust deed state, as is the state where I live. The idea if the deed of trust is to keep foreclosures out of the courts by providing a simple legal procedure for non-judicial foreclosures. The parties of the trust deed are:
Trustor - The home buyer (the borrower).
Trustee - An independent 3rd party licensed by the state to be a trustee, who is not otherwise involved in the transaction. Most trustees are title companies, but there are companies who do nothing except act as trustee.
Beneficiary - The bank (the lender). This is the party who will get either the property or money from the trustee sale in the event of a default.
The way it works is that when you buy a home you execute a deed of trust, which names a "trustee" who is an independent 3rd party that automatically (without filing any legal action) has the right to take certain actions if you don't keep your payments up.
When a homeowner gets too far behind on the loan the bank notifies the trustee that the contract is in default. The trustee then files a document with the county recorder stating that the contract is in default, so the trustee is exercising the trust deed (that paper is typically called a "substitution"). The Substitution gives the trustee the right to sell the property on behalf of the beneficiary. The trustee also files a document called "Notice of Trustee Sale", which designates the time and place of the sale.
Trustee sales are normally private affairs which don't involve the sheriff. The bank (the beneficiary) tells the trustee what the minimum bid will be. Perhaps 95% of the time there are no bids on the property, so the property reverts to the bank (the trustee deeds the property to the bank). Investors will be at the sale. They are looking for bargains, where the bank sets the minimum bid low. All sales are final at the trustee sale, so the buyer assumes all risk with respect to property condition, any liens that might be on the property, as well as any back taxes owed.
It is that assumption of risk that smart banks take advantage of. If the bank sets the bid right, they can unload any potential problems with the property. If they set the bid too high then they will need to sell the property as a bank REO, where buyers can walk through the property to inspect it. Depending on the condition of the property, the bank may or may not come out ahead.
The only way to take advantage of a lower price for the assumption of risk is to participate in the trustee sale. Your realtor may be calling a bank owner REO a foreclosure, but they are actively marketing the property on the open market and looking for as much as they can get. That's a very different situation from the trustee sale.
By the way, some realtors aren't aware of the trustee sale and its significance. I had one realtor tell me that banks simply take the property back after a loan default. To illustrate that point, I found this video at youtube where a realtor went to downtown Phoenix to learn what trustee sales were and how they worked (3 part series). You can tell that she had no idea what it was all about before her little field trip. It's not unusual for a realtor to be in the dark about the process, since they take no active part in it.
The following clip is the trustee sale in Las Vegas where I bought my home. They auction about 500 residential properties each weekday in about 4 hours.
But I bought a 4 bedroom home in Las Vegas for $30,000 that sold for $178,000 four years prior. I attended the trustee sale for about 8 weeks before getting what I wanted.
