Why Banks Accept Short Sales

The Foreclosure Crisis

People sell their house and move every 5 to 7 years.  When the values of real estate started to decline a couple of years ago (some experts say it was in 2006 - others say it started in 2007), something seriously devastating occured in the banking industry.    Because of the state of the economy, homeowners can no longer afford to make the payments on the mortgage, and their loans start to get behind.  All of the homes that were purchased during the real estate boom are now "upside down" in their equity, and the homeowners have no way to get out of the house. The only solution for these sellers is to work a deal out with the bank allowing them to sell the house for less than is owed on the mortgage.  This is what is referred to as a short sale. It is now (2009) become an epidemic that has taken literally taken over the real estate market,and become a common term in the average household.

Ugly, Hanuted or Just Plain Wierd

Banks will consider a short sale on pretty much any property these days. But in order to get a steep discount (20 to 30 cents on the dollar), there needs to be something wrong with the house. Here are the top three reasons a bank will consider a steep discount.

  • The House is Ugly - if the property has deferred maintenance, you can expect to get the bank to agree to a very steep discount on this property.  The market is competitive enough as it is, and the bank does NOT want to own a house that is in desperate need of repairs. They understand that if they end up owning this house after the foreclosure, they will have to price the house below market value in order to get a quick sale. So if the property that you're working on needs repairs, make them stick out like a sore thumb. Bring them to their attention with photos and repair estimates from contractors.
  • The House is Haunted - If the house is hanuted, the bank don't want it!  If you know of any facts or incidents that suggest that the house may be haunted, provide this information to the bank.  Some people may think that this sounds silly, but neighbors and family members will be the first to report if something "unnatural" has occured in the house.
  • The House is Just Plain Wierd - From time to time you'll run across a house that has the wierd factor. It could be wierd floor plans, wierd ceilings (only 6 feet in height), wierd location, wierd surroundings, a "mazey" feel, etc. Anything that makes the house seem different that your traditional home should be brought to the attention of the bank. It's hard to sell wierd stuff, so the bank will be happy to discuss a discount on wierd properties.

Sellers With Hardships Can't Pay Anyway

Each lender will require written documentation from the seller as to why they can not afford to make the payments on the loan any more. They want to know if they seller can or can not afford the house, and the reason why. They'll also want to know if the situation that caused the late payments is expected to change at any time in the future.

When you're collecting the short sale package from your seller, be sure that the hardship letter is included. Provide the seller with some samples of hardship letters that you've received in the past (with the seller's name blacked out, of course), and tell them to be as detailed as possible. The worse their story is, the better your chanced of the bank accepting your short sale offer.

Too Many Defaulting Loans and Time Value of Money

When a bank has too many loans in default, their lending power is weak. Every defaulting loan is like a black mark on their credit report. They become a high risk for investors, and their ability to make money decreases. One thing to remember is that the banks are in the MONEY business, not in the house business. When they see that a loan is in default, they are happy to try to get this non-performing loan off of their books. The only way or them to do that is to consider a short sale and take less than what is actually owed.

When a bank has to forelcose on a loan, it's costs them time and money. They have to pay an attorney to foreclose on the loan. When the property goes to the foreclosure auction, it may not sell. If the house does not sell, then the bank is the proud owner of the property. Now they have to hire a Realtor, obtain a BPO, list the property, and then sit, wait, and hope that the property sells for a fair price. I it doesn't sell quickly, they are forced to keep lowering the price until it does sell.

By negotiating a short sale price, the cut to the chase and eliminate the waiting period and the hassles of having it listed on the market to recoup some of their money.

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Comments 5 comments

James A Watkins profile image

James A Watkins 7 years ago from Chicago

Very nicely done and excellent information. I never thought of claiming my house is haunted—to a bank. I think I'm going to go with that one. :D

Bea Fernandez 7 years ago

Hello Tracy, question for you. What are the implications of a homeowner who has the short sales successfully done on their property, but property owner was an investor, it was not their primary home. For primary homeowners, they are protected from being 1099'd and protected from IRS due to the Mortgage Debt Relief Act. What about the investment properties?

Thank you. Bea

tracycaywood profile image

tracycaywood 7 years ago Author

The Mortgage Debt Relief Act allows taxpayers to exclude income (being 1099'd) from the discharge of debt on their principal residence only. Investment properties do not apply - they will be sent a 1099-C from the lender.

Thomas 7 years ago

I concur with most of what you say. Except, of course, when it comes to Countrywide. I had a haunted house--I compared it to the Munsters' house--I tried to short with them a year and a half ago, and they didn't even counter. It sat vacant--through my state's 6 month redemption period and for another year--until it finally sold last week, for little more than my original offer. RIP, Countrywide. You won't be missed.

Research Analyst profile image

Research Analyst 6 years ago

ugly houses are the best kind of properties for investors to buy, because once they remodel and fix them up they go for high profits.

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