As banks foreclose on millions upon thousands of properties across the country, the question arises, “Can banks make a profit on foreclosed properties?” The simple answer is yes, but it takes some special circumstances for it to happen. If the owner knows how to protect his equity, he may be able to get paid even if he loses his house to the bank.

If the lender convinces the homeowner to give up their property in exchange for a deed in lieu of foreclosure, the bank can make a profit on the sale and not have the added cost of foreclosure. It is generally accepted in the banking industry that a foreclosure averages over $40,000. These costs include loss of interest, loss of additional lending power, increased Federal Reserve requirements, costs of sale, maintenance of the property, and commissions to a sales agent.

The key to whether the bank can make money depends on whether the property has equity. Probably 20% to 35% of the time when a foreclosure takes place, there is equity in the property and there are no secondary liens in place. Many homeowners simply walk out of their homes believing they have no equity or cannot sell their home while it is in foreclosure.

If the bank brings the property to the foreclosure auction and extinguishes minor liens, you’ll be building equity in a matter of minutes. However, if the property has minor liens, the lender will not accept a deed-in-lieu of foreclosure because the minor liens will remain attached to the property. So be careful, if a bank offers the owner a deed in lieu of foreclosure, there may be equity in the property.

Once the property is auctioned and purchased by the bank, the deed to the property is transferred to the bank after a redemption period. At this point, the bank can sell the property for whatever price it can get. If there is a gain, the bank is entitled to it.

In short, once the bank forecloses on a property, it is entitled to make a profit. Before their property, they cannot sell the property, only the deed holder (owner) can sell it. This happens in short sales all the time, as the bank has to accept the sale price, but the owner has to sign the transfer deed. In these cases, the bank takes a substantial discount on your mortgage to sell the property and take it off their books. If the bank outbids at the auction, which is anything close to the final judgment amount, it gets the money owed but loses any additional profit.