Why Would a Lender Accept a Short Sale?
One of the most common misconceptions that a very high percentage of homeowners and agents have is that their lender is waiting ready to jump out and take their house. Nothing could be farther from the truth. Reality is lenders and financial institutions are in the finance business not in the real estate business and they do not want your property. In fact a foreclosure has far reaching financial and regulatory consequences of which most people are not aware.
The True Cost of a Foreclosure
The easiest way to demonstrate why a bank will negotiate a short sale is to break down the actual costs of a foreclosure on .a hypothetical property.
For this example, let's assume we have a property that has a market value of $200,000 and the owner owes the bank $190,000 but the highest offer the agent has submitted to the bank is $180,000. The bank would be crazy to accept it, right? Maybe not let's go through the numbers.
Short Sale
The bank accepts the hypothetical contract above:
| Market value: | $200,000 |
| Loan amount: | $190,000 |
| Sale price: | $180,000 |
| Closing costs: | -$4,000 |
| Commissions: | -$10,800 |
| Proceeds from sale: | $165,200 |
| Loan Amount: | $190,000 |
| Less Proceeds: | -$165,200 |
| Lender Loss: | $24,800 |
Foreclosure
The bank takes over the property to sell at full market value and is able to find a buyer and close within 6 months:
| Market value: | $200,000 |
| Loan amount: | $190,000 |
| Sale price: | $200,000 |
| Seller concession: | -$6,000 |
| Legal fees: | -$7,000 |
| Taxes: | $500 |
| Insurance: | -$1,000 |
| 6 months utilities: | -$600 |
| 6 months maintenance: | -$600 |
| 6 months interest loss: | -$6,650 |
| Association dues: | -$1,200 |
| Closing costs: | -$4,400 |
| Staffing costs: | -$2,000 |
| Commissions: | $12,000 |
| Proceeds from sale: | $158,050 |
| Loan amount: | $190,000 |
| Less proceeds: | -$158,050 |
| Lender Loss: | $31,950 |
As you can see the bank is actually better off with a below-market value offer even if they are able to sell a property in 6 months for full market value. The financial situation could be many times worse for the bank if the property declines in value, needs repairs, a tenant needs to be evicted and many other issues that may arise. A short sale is a sure thing, and the lender keeps the property off of their books.
These are, of course, estimates provided to give you a representation of the real risk of a foreclosure to a lender and the benefits of a short sale.