Foreclosed On? You May Have Unclaimed Cash Waiting for You

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When the U.S. housing bubble burst in 2007, millions of Americans who were unable to keep up with their mortgage payments lost their homes to foreclosure. Even today, tens of thousands of homeowners go through the painful process each month. But in metros like Portland, OR, Denver, and Seattle, where housing prices are rising the fastest in the country, people who’ve lost their homes might actually turn a profit from the foreclosure auction. Maybe even a big profit.

With strong demand for affordable residences in those markets, many homes sold at foreclosure auctions are selling for more than what the lender is owed—in some cases, quite a bit more. And once any debts, liens, and fees are paid off, that money goes back to the individuals who fell behind in their mortgage payments. Score!

Unfortunately, many homeowners aren’t aware that they could be in line for a windfall, and the funds may 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 produce windfalls

The steady rise in home prices in metros like Denver and Seattle has made it more difficult for investors to find inexpensive properties they can fix and flip for a profit. And that’s why the competition is becoming so fierce at the foreclosure auctions. As the economy has improved, there are fewer foreclosures, tightening the market even further.

In the Denver metro area alone, home prices have been 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 started 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 year. In 2016, the county’s average surplus through Dec. 1 was $51,231. That 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 are also 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, compared 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.

The auction winner might not be the only one smiling after a foreclosure auction.

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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 helps former homeowners reclaim that money. She’s even seen folks collect nearly $100,000 after their debts were repaid.

She’s also noticed an uptick in the number of homeowners trying to collect overbids over the past few years.

Portland foreclosure attorney Theodore Piteo, of Michael D. O’Brien & Associates, has noticed the same shift in his city, where home prices rose 10.9% annually in September, according to Case-Shiller.

Two years 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 homes in hot markets

If the market is so strong, it might seem puzzling that these troubled homeowners can’t just refinance and stay in their home—or just sell it. But in most cases, those who are on the brink of foreclosure have other serious financial problems—and that makes it difficult to get a second mortgage or 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.

As for selling, if the owner doesn’t have a lot of equity in the house, it may not be cost-effective. Real estate agent commissions and closing costs can eat up whatever profits might be on the table.

And some homeowners may simply be unaware of how much home prices have risen in their markets.

Plus, it’s only very recently that markets improved to the degree where folks who were about to 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. But 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 hard to find their heirs. Ward often works with funeral homes to track them down.

In some parts of the country, it isn’t so easy for folks to collect that money. In about half of states, lenders can foreclose on a home without any intervention by the courts. So there aren’t always as many safeguards to protect 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 most of the country, 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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