When banks are forced to take back property, they can ultimately end up with a fair number of homes in its inventory, all with values higher than what is owed on them. When a bank does foreclose, they do so at considerable cost and regardless of what some might think a foreclosure is the lastdistressed opportunities avenue a bank wants to take.

For instance, a buyer originally purchases a property for $250,000 and borrows $200,000. The real estate market subsequently takes a major hit and the value is closer to $150,000. The buyer, wanting to sell, must then bring at least $50,000 to the closing table just to settle the mortgage and is stuck in a corner.

Short sales must be requested, they’re not an automatic. But sometimes the property owner still decides it’s better to walk away from the property and let the home go back to the bank. Once that occurs, the bank adds to its losses in multiple ways. Lost revenue from future interest charges and an unsalable loan. Foreclosure expenses and legal fees incurred during the foreclosure process, especially in judicial foreclosure states. And of course, marking down the value of the home from its previous levels to current ones. When banks foreclose, they take the hit. In certain situations, they can file suit against the owner for the past due amounts but most states protect homeowners from being sued in this fashion, especially on a homestead.

The bank then makes a determination as to the existing value and if the home needs any repairs before placing it on the market. Sometimes the bank decides that a property is in such as state of disrepair that it lists the home “as is” without any rehabilitation at all. This is an ideal opportunity for real estate investors to buy real estate at submarket values, clear the lot and build a brand new rental property. For properties in poor shape, there can be a greater return on investment by going the extra step and buying a tear-down for pennies on the dollar.