Question: A bank that is foreclosing on a home holds a first and a second mortgage. The first alone is more than the home is worth. What will the bank typically bid at the sheriff’s sale? Would it bid market price minus second mortgage lien, because the buyer would still have to be paid off?
Answer: – Typically the opening bid is the amount you owe plus foreclosure fees, back payments, etc. If someone bids at the foreclosure auction, then the highest bidder gets the property. If no one bids, the bank takes back the property and sells it through a real estate broker. If the bank does not get paid the full amount they are owed, they can 1099 you for the difference and count the loss as income to you so you have to pay taxes on it.
If the IRS views the foreclosure auction as an actual sale and the bank bids full price at auction, there should be no forgiveness of debt, correct? The bank takes the home for its Fair Market Value (which is whatever they bid on it at public sale). The debt is satified by the property and the difference between the loan and the FMV is zero, hence no forgiveness of debt?
Yes that is correct. Typically when the bank foreclosures the opening bid is they amount they are owed. If no one bids they take back the property as full satisfaction for the loan. Now that takes care of the first… if there are any junior lien holders, they are wiped out but do have the right to go after the homeowner for the amount they lost or 1099 them.
does the bank bid over the value
No, banks usually don’t bid over their value, unless they are in jeopardy of losing a lot of money and justify holding onto it. Usually though, they will hold onto it and not foreclose just yet.
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