Is it true that in foreclosures the bank can only sell the property for the amount of the loan?

Technically, the bank can sell a foreclosure property for any amount they are able to raise at a foreclosure sale, not just the amount of the loan. There are no legal restrictions for how much the bank can sell the property.

In fact, if the bank raises more than the amount of the mortgage loan through a foreclosure sale, some of the profit from the sale may actually find its way back to the lender. However, this extra money is often used to defray legal costs, additional liens on the property or other costs.

The bank can sell a bank foreclosure property for whatever they are able to raise at a foreclosure sale. However, the savings available on foreclosures come from the fact that it is rare for a property to be sold for its full mortgage or market value through an auction, bank owned home sale or other REO sale.

Generally, in order to encourage a sale, a bank foreclosure will actually be undersold. In most cases, a portion of the mortgage will have already been paid back before a foreclosure occurs. Therefore, the bank only needs to raise the money to cover the remaining unpaid loan debt, not the total loan amount.

This factor, along with low competition at sales, leads to the majority of foreclosure real estate to be undersold anywhere from 10 to 50 percent off its market value. Most buyers aren't willing to pay full value for a foreclosure home, and that drives down prices even further. The bank's inability to get full price for a home, or to hang on to the property until they can, is the foreclosure investor’s advantage.