A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. However, just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it. The short sale price must be negotiated between the buyer and lender.
WHY WOULD A BANK CONSIDER A SHORT SALE ?
Reason #1
Because they must avoid foreclosure at all costs – and here’s why. When a bank forecloses on a home it becomes a non-performing loan. This affects the amount of money a bank can borrow from the Federal Reserve.
Since banks only make money by borrowing from the Federal Reserve and lending to the public, they must borrow as much as they can. Every non-performing loan reduces the amount the bank can lend to the public, affecting their bottom line profits.
Reason #2
The bank knows if the property is foreclosed, it goes to auction and is sold for what is owed on the first mortgage and typically not a dime more. This leaves the second mortgage holder getting absolutely nothing.
Think about it – if you were in their shoes, wouldn't you rather recoup something than nothing at all?
So for the bank it’s a no-brainer...and it creates a win-win situation for everyone involved. The bank gets some money, but more importantly they keep a non-performing loan off their books. The homeowner avoids foreclosure and this helps his credit.
Below is a sample case study of a short sale compared to the bank foreclosing and taking the property back as an REO. Notice, the bank loses $12,080 if they go ahead and foreclose on the property – and that doesn’t include the additional $8,775 in closing costs they will likely pay before they are done. In this case, the bank could save almost three times as much if they allow a short sale.
