Foreclosure with an upside? Here's how it works

People forced into foreclosure rarely find a silver lining. They lose their homes and their credit ratings tank. But under the right circumstances, Minnesotans in foreclosure can walk away from the process with tens of thousands of dollars.

Twin Cities real estate agent Chris Bailey has seen it happen. A few months ago, a lender was foreclosing on one of Bailey's clients. Bailey called the law firm handling the deal for details on the sheriff's sale, which starts the last phase of a foreclosure.

One bank bid $225,000 for the property -- far less than it was worth and, more importantly, less than the balance owed on the mortgage. Bailey, a REMAX/Results agent, knew the house would fetch a much higher price and under Minnesota's foreclosure laws, he'd have at least six months from the sheriff's sale to sell it.

It worked. A buyer paid $300,000 for the home. The lender got the $225,000 it said it needed at the sheriff's sale. The lawyers and agents got their cuts. And though the homeowner lost his property, he walked away with $40,000.

Those happy endings are still rare in Minnesota but may be cropping up more frequently. That can be a financial lifeline for foreclosed homeowners -- but only if they know how the system works.

"The bank will never tell you," said Ed Nelson, spokesman for the Minnesota Home Ownership Center, a nonprofit that helps homeowners navigate foreclosure. "The new investor will never tell you, a letter won't come in the mail to say on this date your house sold for this amount, you won't ever get a letter like that."

Nelson said many homeowners don't realize they can still sell their properties during the redemption period permitted under Minnesota law. It follows the sheriff's sale and typically lasts six months. Unless they investigate the matter themselves, he said, homeowners may never even learn of a bank's low bid.

The lender's bid in a sheriff's sale essentially sets the floor on any deal. It may well underbid on a property to boost the chances someone else will buy it and take it off their hands, said Guy Cecala, publisher of the trade publication Inside Mortgage Finance.

During the housing crisis, banks learned the perils of managing and selling foreclosed properties themselves, he said.

"It soon turned into a huge, bottomless hole for many banks," Cecala added. "They ended up with large portfolios of real-estate owned that they had to maintain, that was sucking revenue out of their bottom lines but they didn't know what else to do."

Banks are savvier now and more willing to get properties off their books at break-even costs or even a modest loss, he added.

Wells Fargo serviced the mortgage of Chris Bailey's client and placed a low bid with direction from the government agency that owned the loan. In cases where Wells Fargo owns the loans itself, the bank makes a complex calculation.

"We do use an approach that's based primarily on the value of the property and anticipated holding costs," spokesman Tom Goyda said. Holding costs include overhead for things like maintenance, property taxes, marketing and other re-sale expenses,

Bailey's client, who's expecting a baby, ended up with a good-sized check in a situation where he expected nothing.

Even for those homeowners shrewd enough to walk away with some cash, however, the windfall does nothing to protect their credit rating. Wells Fargo says the bank still reports it to the credit rating agency as a foreclosure.