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What Happens to Repossessed Houses?

Repossessed houses are houses that have fallen into default. If a homeowner can’t keep up with his or her mortgage payments, the bank may repossess the home. This process is also known as foreclosure. But what happens to repossessed houses once the bank takes them back? The answer depends on what the bank decides to do. 

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Why Banks Repossess Homes

Banks like to say that foreclosure is a last resort. You may have heard that foreclosure and eviction are expensive for lenders, and that lenders prefer to keep homeowners in their properties. If a homeowner falls behind on mortgage payments, he or she may be able to work out forbearance or a payment plan with the lender. If not, the lender will issue a notice of default, which puts the home on a path to repossession.

Repossession is not an automatic process, however. In many states, repossession requires a lengthy notification period and an order from a judge. If a bank decides to undertake this process, it’s because the bank can’t or won’t work out an alternative with the homeowner in default.

What Happens Next

What Happens to Repossessed Houses?

When a bank has repossessed a house that house becomes what’s known as a real estate owned property (REO). Investors and savvy homebuyers hunting for bargains may try to buy real estate-owned properties at foreclosure auctions, from the seller or from the bank. Banks will often sell repossessed homes for less than the homes are worth because they want to rid themselves of the burden of keeping the homes and make a quick sale.

If you’re thinking of buying a foreclosure property it’s a good idea to work with a real estate agent with experience in the foreclosure world. And unless you have plenty of cash on hand you’ll still need to prove your creditworthiness to qualify for a mortgage.

Banks don’t necessarily put repossessed homes up for sale right away. They may choose to sit on the property instead, hoping to get a better a price down the road or simply allowing the property to fall into neglect. No matter how long it takes a bank to sell a repossessed house, the bank is responsible for maintaining the property.

However, banks have been called out for failing to maintain REOs in minority neighborhoods. The National Fair Housing Alliance brought complaints with the Department of Housing and Urban Development against both Wells Fargo and U.S. Banks. The complaints allege that the banks violated the Fair Housing Act by allowing homes in black and Hispanic neighborhoods to fall into disrepair, as reported by ProPublica.

Bottom Line

What Happens to Repossessed Houses?

It’s up to the bank whether to sell up or hold repossessed houses on its books. In some states, homeowners whose homes have been foreclosed retain the right to redeem the property if they can come up with the required funds within a certain time frame specified in the law. A private investor or buyer may step in during the pre-foreclosure stage to buy the property before the bank repossesses it. In short, not all distressed properties meet the same fate.

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Photo credit: ©iStock.com/fstop123, ©iStock.com/Purdue9394, ©iStock.com/KLH49

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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