When the U.S. housing bubble burst in 2007, millions of Americans who were unable to keep up with their mortgage payments lost their properties to foreclosure. Even today, tens of thousands of homeowners go through the painful process each month. However in metros like Portland, OR, Denver, and Seattle, where housing prices are rising the fastest in the nation, people who’ve lost their homes might actually make money from the foreclosure auction. Perhaps even a large profit.
Foreclosed On? You might have Unclaimed Money
With strong demand for affordable residences in those markets, many homes sold at foreclosure auctions are selling for more than exactly what the lender is owed-in some instances, quite a bit more. As soon as any debts, liens, and charges are paid back, those funds goes back to the individuals who fell behind in their mortgage payments. Score!
Unfortunately, many homeowners aren’t conscious that they may be in line for a windfall, as well as the funds might go uncollected. Denver County, CO, is sitting on nearly $1.5 million in uncollected surpluses from about 50 foreclosed homes.
“This was never an issue up until [very recently] and only in a few markets,” says Brandon Turner, author of “The Book on Rental Property Investing.”
“In the past, people who lost their homes to auctions were typically underwater. … [Now] prices have risen so that real estate investors, especially at auctions, are sometimes willing to pay more than what the [homeowner] lost it for.”
The metros where foreclosures can create windfalls
The steady increase in home prices in metros like Denver and Seattle has made it harder for investors to locate inexpensive properties they are able to fix and flip for a profit. And that’s why the competition is now so fierce at the foreclosure auctions. As the economy has improved, there are fewer foreclosures, tightening the market even more.
In the Denver metro area alone, home prices are actually rising at a rate of about 10% annually since early 2011, according to CoreLogic data.
“Denver is one of the hottest real estate markets in the nation right now,” says Mica Ward, spokeswoman for the public trustee of Denver County, the office tasked with returning foreclosure surpluses. “So when a home does have to sell at a foreclosure auction, we’re consistently seeing that the home is selling for more than what is owed.”
She started seeing an uptick in overbids on foreclosure properties a few years ago, when the economy began to improve. Now she estimates that about 80% of foreclosure auctions in Denver County end with surpluses over the original debt.
That can translate to as little as $60-or as much as the $169,000 she returned to one (now) lucky foreclosee this current year. In 2016, the county’s average surplus through Dec. 1 was $51,231. Which was a 156% jump from $20,000 in 2012.
“Often this money can truly change a person’s life and get a person back into a home and on the right track again,” Ward says.
Overbids also are increasingly common in Miami, which was also walloped by the housing bust, says local foreclosure attorney Bruce Jacobs. They’re typically in the range of tens of thousands of dollars. Home prices in Miami are up 6.6% in September, in comparison with the year before, according to the most recent data from the S&P CoreLogic Case-Shiller home price indices.
“You’re seeing it more and more now because property values have recovered,” he says.
Surpluses in the Seattle area, where home prices were up 11% year over year in September, typically range from $10,000 to $50,000, says Chelsea Hicks, a staff attorney at the Northwest Justice Project, which assists former homeowners reclaim that money. She’s even seen folks collect nearly $100,000 after their debts was repaid.
She’s also noticed an uptick in the number of homeowners attempting to collect overbids over the past couple of years.
Portland foreclosure attorney Theodore Piteo, of Michael D. O’Brien & Associates, has noticed exactly the same shift in his city, where home prices rose 10.9% annually in September, reported by Case-Shiller.
24 months ago, Piteo wasn’t seeing any surpluses from foreclosure auctions. Now, he estimates they’re happening about 10% to 20% of the time.
“As long as the property market keeps going up, there will continue to be overbids,” he says.
Why people are still losing their properties in hot markets
If the marketplace is so strong, it might seem puzzling that these troubled homeowners can’t just refinance and remain in their home-or just sell it. However in many instances, those who are on the brink of foreclosure have other serious financial problems-and that makes it difficult to get a second mortgage or even a home equity loan, says bankruptcy and foreclosure attorney Clark Dray, who is based in Denver.
“Their debt-to-income ratio is probably not any good at that point,” he says.
Regarding selling, in the event the owner doesn’t have a great deal of equity in the house, it might not be cost-effective. Real estate agent commissions and closing costs can consume whatever profits might be available.
And some homeowners may simply be unaware of just how much home values have risen in their markets.
Plus, it’s only very recently that markets improved to the degree where folks who were on the verge of lose their homes had so much equity, says Geoff Walsh, a staff attorney at the National Consumer Law Center.
“The overwhelming majority of the foreclosures that took place since 2008 involved homeowners who … were very much underwater,” he says. “They were just people who did not have a lot of other options.”
Thousands of dollars in search of owners
You’d think that former homeowners mired in debt would be clamoring for any money they’re due. However it can be difficult for authorities to inform them of their windfall.
“Some people simply aren’t going to read the mail we send them, because they assume it’s just one more bad piece of news,” says Ward, of the Denver trustee’s office. “People move, and they don’t give us their forwarding address.”
And when a homeowner passes away, it’s often difficult to find their heirs. Ward often works together with funeral homes to track them down.
In some parts of the country, it isn’t so easy for people to collect that money. In approximately half of states, lenders can foreclose on a home without any intervention by the courts. So there aren’t always as many safeguards to shield homeowners in distress, says Walsh.
“If there’s a dispute about the sale proceeds … you would have to actually file a lawsuit to deal with that,” Walsh says. In other cases, former homeowners might need to go to court or file lots of legal paperwork.
But still, in the majority of of the nation, foreclosure surpluses remain the extreme exception rather than the rule.
“That is still very unusual,” says Richard Alderman, director of the Center for Consumer Law at the University of Houston in Texas. “You need a strange combination of factors for this to happen.”
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