I got this question from a reader…

“Am I understanding that when an owner loses his house in foreclosure and the auction takes place, he can actually purchase his own home back at a cheaper cost? In other words, can he bid on his own home?”

Let’s discuss the last question first, “Can the owner bid at his own foreclosure auction?”

The answer is, “Yes”. But like all bidders you must have the cash to complete the transaction sometimes in 24 hours. The starting bid amount in first mortgage foreclosure auctions is all the monies they are owed including foreclosure costs, default interest, fees, etc….so it is substantially more than the what the former owner owed at the time of default.

This leads us to answer the question of buying the “home back at a cheaper cost”. The answer to that is, ‘Highly Unlikely, But Possible”.

Some may believe if the home is encumbered by a second mortgage and the second mortgage gets “wiped-out” by foreclosure auction, this means the home owner if he wins the house for the initial lender bid, even with the fees and costs, he’d be getting his own house back cheaper. After all wiping out a $100,000 second mortgage or line of credit is a boon to the winner bidder at auction. Why is this different for the former owner should he be the winner?

Here’s why. Even though the auction eliminated the “security” of the home as collateral for the second mortgage, the foreclosure auction did not “extinguish” the debt…the debt and the obligation to repay is still in force.

Only a bankruptcy court or paying the debt in full extinguishes the contractual obligation to pay the second mortgage. This debt will undoubtedly find it’s way back to the owner’s home and reattach should he be successful at auction. Of course, one does have some leverage with the former secondary creditor, so a discount could be negotiated that could possibly lead to buying the home back cheaper. In this market, it’s worth a try!

Good Luck!

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