Why Banks Like Short Sales

Can we really say that banks like short sales? A lender’s first choice is to have every mortgage loan paid off in full and on time, but I think we all know that this happens only in Fantasyland. When they have to deal with another outcome, their second choice is to get as much money as possible in return for their investment — “as possible” being the operative term. They don’t necessarily like foreclosure any more than the homeowner does.

Short sales generally happen only during the foreclosure process when the property owner would really like to sell, but the only offers they get are for the property’s value and are not quite enough to cover the balance due on the mortgage. Lenders — and by lenders, I mean either the actual lenders or the loan servicers — pass those borrowers on to their loss mitigation departments, where they decide how best to cut their losses.

Loss mitigation departments are on a mission, just like we are. In the pre-foreclosure stage, their job is to find ways to minimizing the damage from a loan that looks like it’s going to go bad. When the lender needs to find an option other than foreclosure, they can explore loan modifications, forbearance, deeds-in-lieu, or short sales. Foreclosure is the last resort because a sheriff’s sale is going to generate the least amount of long-term income and the most amount of interim expenses.

To a lender who is desperately hoping the borrower will simply catch up on the loan, a loan workout is the next best thing. The homeowner agrees to a repayment plan for the amount past due, and everyone hopes it will work out. The catch is that the homeowner has to be financially stable before the lender will agree to a loan modification, and in too many cases, that condition can’t be met — that’s why they got into trouble in the first place.

Short sale investors, take note. What each and every loss mitigation department is trying to avoid is foreclosing on a property, and it’s not because of that warm, fuzzy feeling they get when they help someone keep their house. They lose more money from foreclosing than they do from agreeing to a sound-minded short sale deal.

The truth is that, when lenders are forced to foreclose, they either have to hope to get a good price for the property at the sheriff’s sale or they may have to repossess the property and sell it as a bank-owned property (REO) through a real estate agent. When the property is sold as an REO, of course the lender gets the net proceeds, but in the meantime, the lender has to pay for the upkeep of the property until the closing. Now, multiply those monthly expenses by the number of months it takes to sell the average REO.

The lender’s proceeds from any post-foreclosure sale are almost never the full amount they originally loaned. In many cases, lenders lose about $60,000 to $80,000 per foreclosure, and that number is climbing all the time. In addition, lenders only retain about 50 percent of their original loan amount when they foreclose and then sell as an REO.

Want to know more about how to get through a short sale negotiation with a lender? Visit the Strategic Real Estate Coach website. We help investors through these conversations every day, including how to discuss financial alternatives with a lender’s loss mitigation department.

Foreclosure is a problem for both the lender and the homeowner. Be a part of the solution. Learn how to start a conversation between both parties and bring in an end buyer for a short sale that can help end that conversation on a positive note for everyone.