What are the cost differences between a deed In lieu and a judicial foreclosure and the effect of those differences?

Question

Reading this interesting question and great answer:

How do banks lose money on foreclosures?

I was thinking back to several episodes of the Clark Howard radio program where he states that Deed In Lieu of Foreclosure is a preferable option for both the lender and the borrower.

For the borrower, there is a shorter penalty time span than a judicial foreclosure because the Deed In Lieu shows the borrower, while busted, did their best to end the contract as a participant with the bank rather than an adversary.

The radio host then goes on to explain it is cheaper for the bank. Why? This answer explains much of the loss is accounting because the banks basically borrow money to lend.

But a Deed in Lieu will suffer the same accounting issue. What are the differences that save the bank expenses?

As a home buyer, can I tell the difference between a bank sale that was judicial and deed in lieu? Does that matter to me if I make an offer?

Answer 1

If the homeowner knows the situation is hopeless, and the end result will be the loss of the home, jumping to the end result can be helpful. It is quicker, they don't spend as much time fighting a losing battle. Deed in Lieu of foreclosure is not so great for the borrower if the bank goes after them for the rest of the money owed. There can also be tax implications if the debt is forgiven. Though these issues also exist when the drawn out foreclosure option is done.

For the bank. The longer the process the more the house deteriorates. The borrower may stop maintenance and may even vandalize the house. Getting their lock on the door quickly is important to them. They protect it, clean it, and prep it for sale right away. They also save on lawyer fees. They know that the moment they start the foreclosure process all money from the borrower stops, this can save thousands in carrying costs.

One issue will be how the accounting losses will be divided among the servicing company, and the investors. If the servicing company will make more money from the longer process they may not push for the quick settlement. If the opposite is true, they will be quickly on board.

For the new buyer, the issue with either foreclosure is that the longer process can result in greater hidden and visible damage. The heat pump may work, but the disgruntled homeowner stopped changing the filters the last six months. They may have also removed and damaged things on the way out. Other than that I don't see a big difference. Because the bank had lower costs involved in the foreclosure they might settle for a lower purchase price, but that might be hard to know.